In order to assure that financial statements are free from material misstatements, auditors make materiality judgments d
Posted: Sun Jun 05, 2022 7:25 pm
In order to assure that financial statements are free from
material misstatements, auditors make materiality judgments during
the planning phase of the audit. They ultimately gather sufficient
evidence to be certain of this assurance. The lower the materiality
threshold an auditor has for an account balance, the more the
evidence the auditor must collect to be sure the account balance is
correctly stated. Auditors usually use quantitative benchmarks such
as 1% of total assets or 5% of revenue to determine whether
misstatement materially affect the financial statements. However,
at the end of the day, a given misstatement is considered material
or not based on the auditor’s professional judgment. Celestial Ltd
and Tepas Ltd are clients of Eureka &Associates, a local
auditing firm in Ghana. Celestial Ltd has weaker controls over
account receivable compare to Tepas Ltd (i.e. Celestial Ltd is
riskier than Tepas Ltd). Again, Tepas Ltd is smaller in size to
Celestial Ltd, and the auditor (Eureka &Associates) has
concluded that a misstatement exceeding GH¢5,000,000 will be
material for Tepas Ltd’s account receivables. Required a) Should
the materiality threshold for Celestial Ltd be the same as, more
than or less than that for Tepas Ltd? Explain b) Discuss why one
client may require more audit evidence to be collected. c) Compare
the possible alternative monetary threshold that a more skeptical
auditor versus a less skeptical might make for Celestial Ltd
material misstatements, auditors make materiality judgments during
the planning phase of the audit. They ultimately gather sufficient
evidence to be certain of this assurance. The lower the materiality
threshold an auditor has for an account balance, the more the
evidence the auditor must collect to be sure the account balance is
correctly stated. Auditors usually use quantitative benchmarks such
as 1% of total assets or 5% of revenue to determine whether
misstatement materially affect the financial statements. However,
at the end of the day, a given misstatement is considered material
or not based on the auditor’s professional judgment. Celestial Ltd
and Tepas Ltd are clients of Eureka &Associates, a local
auditing firm in Ghana. Celestial Ltd has weaker controls over
account receivable compare to Tepas Ltd (i.e. Celestial Ltd is
riskier than Tepas Ltd). Again, Tepas Ltd is smaller in size to
Celestial Ltd, and the auditor (Eureka &Associates) has
concluded that a misstatement exceeding GH¢5,000,000 will be
material for Tepas Ltd’s account receivables. Required a) Should
the materiality threshold for Celestial Ltd be the same as, more
than or less than that for Tepas Ltd? Explain b) Discuss why one
client may require more audit evidence to be collected. c) Compare
the possible alternative monetary threshold that a more skeptical
auditor versus a less skeptical might make for Celestial Ltd