New auditing standards effective for 2007 require auditors to make and document both materiality and tolerable misstatement decisions. Bad decisions can lead to either inefficient or ineffective auditing. This course explains and provides examples of four widely-used methods for making materiality decisions. It also explains and illustrates three methods for converting these overall materiality decisions to tolerable misstatement decisions for individual accounts and feeding these into testing decisions. Requirements and techniques for deciding on and documenting consideration of undetected error are also explained and illustrated.

Major topics:

• Professional standards on materiality and tolerable error: materiality defined; quantitative factors; qualitative factors
• Understanding the audit risk and materiality linkage: audit risk model; factors affecting materiality decision
• Practical approaches to materiality decisions: constant materiality measures; variable percentage materiality measures; blend methods; formula methods
• Converting materiality to meaningful tolerable misstatement decisions: judgmental ,ratio and quantitative tolerable misstatement decisions
• Feeding tolerable error into testing and sampling decisions: individually significant items; sample size determinations
• Misstatement aggregation requirements: unadjusted prior period misstatements; known current period misstatements; projected misstatements; undetected misstatements
• Reporting and disclosure issues: SAS 107;SEC Form 20-F, fact situation

Level of Knowledge: Intermediate

Prerequisites: None