a. Franklin Co.
Auditors frequently use a sliding scale to determine overall materiality. For example, they may use 1% of total revenue for materiality on the audit of a small company; they may use 0.5% of total revenue if auditors assume that it is a large corporation. In addition, absolute amount of materiality is very important. Auditor has to consider the following measures that may be relevant for materiality since Franklin Co. is a large corporation.
Total assets (0.05%) 174,500
Total revenue (0.05%) 148,000
Net income before taxes (5%) 80,000
As a result, the auditor may choose the range of $80,000 to $174,500 for materiality for Franklin Co.
b. Tyler Co.
Since Tyler Co. is a small company, auditor may use higher percentage, such as 1% or 10%; the auditor would not use these measures because the net income and equity of Tyler Co. is very low. So the auditor will consider the following measures that may be relevant for materiality.
Total assets (1%) 27,000
Total revenue (1%) 45,000
c. 5 characteristics:
1. It might involve conformity with regulatory requirements.
2. It might involve hiding illegal or unlawful transactions.
3. It might involve compliance with loan agreement.
4. It might concerns a portion of the business of a company which has been recognized as important for it to function or be profitable.
5. It might be occurred from an item which is capable of specific measurement.
When audit sampling is being used for substantive testing for one or more account, such an allocation is usually done to assist the auditor in determining the scope of substantive procedures. If auditors don’t allocate materiality to individual accounts, however, they may not detect the errors that are relatively larger, as they would be combined with other undetected errors causing the materiality measure to exceed.
The main reason is that many misstatements which are related to various accounts often offset each other. And the other reason is that materiality must