if anyone could help me with this part a little, would be greatly apretiated. De

Question

if anyone could help me with this part a little, would be greatly apretiated.

Dermaceutics, Inc. Part III

Question 15:

What is materiality? What are the primary factors affecting the auditor's assessment of materiality at the planning stage of the audit?

Question 16:

How does materiality relate to concepts of audit risk?

Question 17:

Compare and contrast the following four types of audit tests:

Tests of controls

Tests of details of transactions

Tests of details of account balances

Substantive analytical procedures

Question 18:

What is the purpose of each of the four types of audit tests? Explain.

Question 19:

Auditing procedures generate evidence for the auditor. Compare and contrast the evidence generated by the following seven types of auditing procedures:

Inquiry

Observation

Examination of documentation

Confirmation

Physical examination

Reperformance

Analytical procedure

Recalculation

Question 20:

What is detection risk? What does the achieved level of detection risk for a set of audit objectives depend on?

Question 21:

How is the nature, timing, and extent of substantive tests affected by the desired level of detection risk?

Note: You must apply questions above to your client, Dermaceutics Inc.

Explanation / Answer

The materiality principle states that an accounting standard can be ignored if the net impact of doing so has such a small impact on the financial statements that the financial statements are not misinterpreted.

As per generally accepted accounting principles (GAAP), it is not neccassary to implement the provisions of an accounting standard if an item is immaterial and hence can be ignored while prepartion of financial statements. There is no definitive guidance in distinguishing material information from immaterial information, so it is a judgment which has to be exercised in deciding if a transaction is material or not. Materiality is defined as the magnitude of an omission of accounting information that makes it probable that the judgment of a reasonable person relying on the information would have been changed or influenced by the omission. Materiality is important because if financial statements are materially misstated, users' decisions may be affected, and hence can cause financial loss to them.

The auditor must therefore make an assessment of the likely users and the decisions they will make. Materiality is also difficult to apply because it is a relative concept. The auditing standards offer very little specific guidance regarding the application of materiality. The auditor must, therefore, exercise considerable professional judgment in the application of materiality.
A preliminary judgment about materiality is set for the financial statements as a whole. Tolerable misstatement is the maximum amount of misstatement that would be considered material for an individual account balance. The amount of tolerable misstatement for any given account is dependent upon the preliminary judgment about materiality. Ordinarily, tolerable misstatement for any given account would have to be lower than the preliminary judgment about materiality. In many cases, it will be considerably lower because of the possibility of misstatements in different accounts that, in total, cannot exceed the preliminary judgment about materiality.

The preliminary judgment about materiality is the maximum amount by which the auditor believes the financial statements could be misstated and still not affect the decisions of reasonable users. Several factors that affect the preliminary judgment about materiality and are as follows:

1. Materiality is a relative rather than an absolute concept.
2. Basis of evaluation of materiality are needed.
3. Usually qualitative factors affect materiality decisions.
4. Expected distribution of the financial statements will affect the preliminary judgment of materiality. If the financial statements are widely distributed to users, the preliminary judgment of materiality will probably be set lower than if the financial statements are not expected to be widely distributed.
5. The level of acceptable audit risk will also affect the preliminary judgment of materiality.

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