question 1- materiality is a concept that can be applied quantitatively or quali

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question 1- materiality is a concept that can be applied quantitatively or qualitatively. in essene, it is a concept used to ensure that the auditor gathers sufficient evidence to render and opinion on the financial statements without adversely affecting the decision of a reasonable person relying on the financial statements. question 2- setting audit risk at 5% us a valid setting for controlling audit risk at a low level only if the auditor assumes that unherent risk is 100% or gignificantly greater then the real level of inherent risk Question 3-

Explanation / Answer

Solution;-

Materiality is a concept or convention within auditing and accounting relating to the importance/significance of an amount, transaction, or discrepancy. The objective of an audit of financial statements is to enable the auditor to express an opinion whether the financial statements are prepared, in all material respects, in conformity with an identified financial reporting framework such as Generally Accepted Accounting Principles (GAAP). The assessment of what is material is a matter of professional judgment.
"Information is material if its omission or misstatement could influence the economic decision of users taken on the basis of the financial statements. Materiality depends on the size of the item or error judged in the particular circumstances of its omission or misstatement. Thus, materiality provides a threshold or cut-off point rather than being a primary qualitative characteristic which information must have if it is to be useful."The Financial Accounting Standards Board (FASB) has refrained from giving quantitative guidelines for determining materiality. This has resulted in confusion in the use of Auditing Standards No 47, "Audit Risk and Materiality in Conducting the Audit". Several common rules that have appeared in practice and academia to quantify materiality include:

Percentage of pre-tax income or net income (i.e., 5% of average pre-tax income (using a 3-year average));

Percentage of gross profit;
Percentage of total assets; (i.e.,1/3% of total assets);
Percentage of total revenue; (1/2% of total revenues);
Percentage of equity; (i.e.,1% of total equity);
Blended methods involving some or all of these definitions (e.g., use a mix of the above and to find an average);
"Sliding scale" methods which vary with the size of the entity. (i.e., 5% of gross profit if between $0 and $20,000; 2% if between $20,000 and $1,000,000; 1% if between $1,000,000 and $100,000,000; 1/2% if over $100,000,000)

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