Question

Assume materiality for the financial statements as a whole is​ $100,000 and performance materiality for accounts receivable is set at​ $40,000. If the auditor finds one receivable that is overstated by​ $55,000, what should the auditor​ do?

A. If accounts receivable testing was performed using sampling​ techniques, the auditor would also project total known misstatements to the population and may perform additional tests depending on the outcome.   

B. If performance materiality for accounts receivable is​ $40,000 and the auditor finds a​ $55,000 overstatement of a receivable​ balance, the auditor would document the misstatement and evaluate results of the remaining audit procedures in accounts receivable.

C. The​ $55,000 overstatement is an example of a known misstatement. The auditor could request the client make an adjustment to correct the overstatement or make a note of the overstatement for​ follow-up at a later point in the audit.

D. All of the above.

Answer 1

Materiality is the magnitude of an omission or misstatement of accounting information that makes it probable that the judgement of a reasonable person relying on the information would have been changed or influence by the omission of misstatement.

If performance materiality for a/r is $40,000 and the auditor finds a $55,000 overstatement of a receivable balance, the auditor would document the misstatement and evaluate results of the remaining audit procedures in a/r. The $55,000 overstatement is an example of a known misstatement. The auditor could request the client make an adjustment to correct the overstatement or make a note of the overstatement for follow-up at a later point in the audit. If a/r testing was performed using sampling techniques, the auditor would also project total known misstatements to the population and may perform additional testing depending on the outcome.

Thus answer is D. All of the above.