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Cloud 9 - Continuing Case W&S Partners use the following percentages as starting points for the...
Cloud 9 - Continuing Case W&S Partners use the following percentages as starting points for the various benchmarks: W&S Partners has just won the January 31, 2023, audit for Cloud 9. The audit team assigned to this client is: Threshold (%) Benchmark • Partner, Jo Wadley • Audit manager, Sharon Gallagher Income before tax 5.0 Total revenue 0.5 Gross profit 2.0 • Audit senior, Josh Thomas Total assets 0.5 • IT audit manager, Mark Batten Equity 1.0 • Experienced staff, Suzie Pickering • First-year staff, Ian Harper These starting points can be increased or decreased by taking into account qualitative client factors, which could be: • The nature of the client's business and industry (for example, rapidly changing, either through growth or downsizing, or an unstable environment). As a part of the risk assessment phase for the new audit, the audit team needs to gain an understanding of Cloud 9's structure and its business environment, determine materiality, and assess • Whether the client is a public company (or subsidiary of) subject to regulations. the risk of material misstatement. This will assist the team in de- veloping an audit strategy and designing the nature, extent, and timing of audit procedures. One task during the planning phase is to consider the con- cept of materiality as it applies to the client. Auditors will de- sign procedures to identify and correct errors or irregularities that would have a material effect on the financial statements • The knowledge of or high risk of fraud. Typically, income before tax is used; however, it cannot be used if reporting a loss for the year or if profitability is not consistent. When calculating PM based on interim figures, it may be nec- essary to annualize the results. This allows the auditors to plan the audit properly based on an approximate projected year-end balance. Then, at year-end, the figure is adjusted, if necessary, to and affect the decision-making of the users of the financial statements. Materiality is used in determining audit procedures and sample selections, and evaluating differences from client records to audit results. Materiality is the maximum amount of misstatement, individually or in aggregate, that can be accepted in the financial statements. In selecting the benchmark to be used to calculate materiality, the auditors should consider the key drivers of the business. They should ask, “What are the end users (that is, stockholders, banks, etc.) of the accounts going to be looking at?" For example, will stockholders be interested in profit figures that can be used to pay dividends and increase share price? W&S Partners' audit methodology dictates that one plan- ning materiality (PM) amount is to be used for the financial statements as a whole. The benchmark selected for determin- ing materiality is the one determined to be the key driver of the reflect the actual results. Required Answer the following questions based on the information pre- sented for Cloud 9 in the appendix to this text and in the current chapter and previous chapters. a. Using the October 31, 2022, trial balance (in the appendix to this text), calculate planning materiality and include the justification for the benchmark that you have used for your calculation. b. Discuss how the planning materiality would be used to deter- mine performance materiality. c. If the planning materiality amount is subsequently increased or
Answers
a) MATERIAUTY: Material items are those which may affect the judgmental of users of financial statement .lt may be quantitative or qualitative. It depends upon size of item, nature of item, statutory providing. High materiality level leaves the audit rise at lower degree. BENCHMARK MATERIALITY: 1.the percentage comparison may be used in deciding the materiality of an item. 2.This percentage criteria for determined material levels is known as benchmarking. PLANNING MATERIALITY: Planning materiality refers to the mistaken amount set by the auditors at the planning stage of an audit based on material to financial statement .planning material used by the audition to assess whether the mistaken as individual or aggravated material misstated in the financial statement and those mistaken could be misleading the users who use financial information to make the incorrect decision. This is done normally by using the combination of both quantitative or qualitat ive method. 0.5%to 1% of sales revenue 1%to 2% of total assets 1%to 2% of gross profit 2% to 5% of shareholders equity 5% to 10% of net profit In calculations planning material the auditor might be taking the highest amount from the above factors. The auditor needs to understand the qualitative factor of materiality in the financial statement of entity before conclusion the size of planning materiality B). DISCUSS HOW PLANNING MATERIAUTY IS USED TO DETERMINE PERFORMANCE MATERIALITY: When established the overall Audit strategy,the auditor shall determine materials for the financial statement as a whole .If ,there is one or more particular item for which misstatements of lesser amounts than the materiality for the financial statements as a whole could reasonable be expected to influence the economic decisions of users taken on the basis of the financial statements, the auditor shall also determine the material level or levels to be applied to those particular item. The auditor shall determine performance material for purposes of assassin the risks of material mistaken of determined the nature, timing and extent of further audit procedures. USE OF BENCHMARK IN DETERMINING MATERIALITY FOR THE FINANCIAL STATEMENTS AS A WHOLE: Determined matemity involves the exercise of profession judgment. A percentage is often applied to chosen benchmark as a starting point in determined material for the financial statements as whole. Factors that may affect the dedication of a appropriate benchmark include the following: 1. The elements of the financial statements( assets, liability, equity, revenue,expenses) 2. whether there are items on which the attention of the users of the particular entity financial statements tends to be focused ( for example for the purpose of evaluating financial performance users may tend to focus on profile,revenue,or net assets) 3. The natural of the entity, where the entity is at in its life cycle ,the industry and economics environment in which the entity operates. 4.the relative volatility of the environment. 5. The entity ownership structure and the way it is financed.(for example, if an entire is financed solely by debt rather than equity , users may put more emphasis on assets, and claims on them ,that on equity entity's earnings) C) The auditor needs to set performance material to leave that the financial statements .materiality or planning material. it is normally calculated by setting the percentage of planning materiality. From 50% to 80% of financial statements that have fewer risks to financial statement. Do financial statement that have high risks of misstatement ,the performance material is normally low percentage of planning material in suck case the auditor rank from 20% or 30% something CONCLUSION: Planning material is the material to financial statements that auditor set in planning stages .This is same as material concept Any mistaken or omission that real planning material level required adjustment to ensure that the financial statement are true and fair
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