The level of materiality that the auditor determines: A. is the same for all clients. B. should always be based on the net profit after tax. C. is dependent on the auditor’s judgment. D. should always equal 5 percent of a relevant base

The audit client is a listed company with a net profit of $10 million and total assets of $400 million. Which should be used as the benchmark to determine materiality?If the auditor decide to use 5% of net profit as preliminary judgement about materiality, what is its dollar value?

In determining the materiality levels, if mostly depends on the auditor's professional skepticism.Group of answer choicesTrueFalse

In assessing the materiality levels, the auditor mainly considers the quantitative aspect of the Financial Statements and the qualitative aspects only follows it.Group of answer choicesTrueFalse

Auditing Standard ASA 320Materiality in Planning and Performing an AuditASA 320 - compiled - 13 - AUDITING STANDARDA8. Determining a percentage to be applied to a chosen benchmark involves the exercise ofprofessional judgement. There is a relationship between the percentage and the chosenbenchmark, such that a percentage applied to profit before tax from continuing operations willnormally be higher than a percentage applied to total revenue. For example, the auditor mayconsider five percent of profit before tax from continuing operations to be appropriate for aprofit-oriented entity in a manufacturing industry, while the auditor may consider one percentof total revenues or total expenses to be appropriate for a not-for-profit entity. Higher orlower percentages, however, may be deemed appropriate in the circumstances.Considerations Specific to Small EntitiesA9. When an entity’s profit before tax from continuing operations is consistently nominal, asmight be the case for an owner-managed business where the owner takes much of the profitbefore tax in the form of remuneration, a benchmark such as profit before remuneration andtax may be more relevant.Considerations Specific to Public Sector EntitiesA10. In an audit of a public sector entity, total cost or net cost (expenses less revenues orexpenditure less receipts) may be appropriate benchmarks for program activities. Where apublic sector entity has custody of public assets, assets may be an appropriate benchmark.Materiality Level or Levels for Particular Classes of Transactions, Account Balances or Disclosures(Ref: Para. 10)A11. Factors that may indicate the existence of one or more particular classes of transactions,account balances or disclosures for which misstatements of lesser amounts than materiality forthe financial report as a whole could reasonably be expected to influence the economicdecisions of users taken on the basis of the financial report include the following: Whether law, regulation or the applicable financial reporting framework affect users’expectations regarding the measurement or disclosure of certain items (for example,related party transactions the remuneration of management and those charged withgovernance, and sensitivity analysis for fair value accounting estimates with highestimation uncertainty). The key disclosures in relation to the industry in which the entity operates (forexample, research and development costs for a pharmaceutical company). Whether attention is focused on a particular aspect of the entity’s business that isseparately disclosed in the financial report (for example disclosures about segments ora significant business combination).A12. In considering whether, in the specific circumstances of the entity, such classes oftransactions, account balances or disclosures exist, the auditor may find it useful to obtain anunderstanding of the views and expectations of those charged with governance andmanagement.Performance Materiality (Ref: Para. 11)A13. Planning the audit solely to detect individually material misstatements overlooks the fact thatthe aggregate of individually immaterial misstatements may cause the financial report to bematerially misstated, and leaves no margin for possible undetected misstatements.Performance materiality (which, as defined, is one or more amounts) is set to reduce to anappropriately low level the probability that the aggregate of uncorrected and undetectedmisstatements in the financial report exceeds materiality for the financial report as a whole.Similarly, performance materiality relating to a materiality level determined for a particularclass of transactions, account balance or disclosure is set to reduce to an appropriately lowlevel the probability that the aggregate of uncorrected and undetected misstatements in thatAuditing Standard ASA 320Materiality in Planning and Performing an AuditASA 320 - compiled - 14 - AUDITING STANDARDparticular class of transactions, account balance or disclosure exceeds the materiality level forthat particular class of transactions, account balance or disclosure. The determination ofperformance materiality is not a simple mechanical calculation and involves the exercise ofprofessional judgement. It is affected by the auditor’s understanding of the entity, updatedduring the performance of the risk assessment procedures; and the nature and extent ofmisstatements identified in previous audits and thereby the auditor’s expectations in relation tomisstatements in the current period.Revision as the Audit Progresses (Ref: Para. 12)A14. Materiality for the financial report as a whole (and, if applicable, the materiality level or levelsfor particular classes of transactions, account balances or disclosures) may need to be revisedas a result of a change in circumstances that occurred during the audit (for example, a decisionto dispose of a major part of the entity’s business), new information, or a change in theauditor’s understanding of the entity and its operations as a result of performing further auditprocedures. For example, if during the audit it appears as though actual financial results arelikely to be substantially different from the anticipated period end financial results that wereused initially to determine materiality for the financial report as a whole, the auditor revisesthat materiality.

Which of the following is least likely considered by the auditor in developing the overall audit plan?Select one:a.Relevant risk and materiality.b.The involvement of other auditors in the audit of major component of financial statementsc.Understanding of the accounting and internal control systems.d.The general level of competence of audit assistants.