Purpose of Materiality Judgments and Common Benchmarks What are the key perspectives and concerns that auditors should be aware of when making materiality judgments? Explain the purpose of materiality judgments and common benchmarks

Answer 1

The key perspectives and concerns in materiality judgments are:
Auditors should pay attention to investor comment letters sent to the FASB, SEC, PCAOB, or other regulators to better understand materiality issues from an investor viewpoint. Investors are interested in long-term developing issues, not just short-term trends.
Audit firms realize that materiality judgments are difficult to make. As such, they spend a great deal of time training staff on how to make these judgments appropriately. Further, they have policies and computer decision aids that assist auditors in making the judgments correctly.
Auditors may overrely on quantitative measures of materiality because such measures do not require much thinking. The SEC has been very critical of auditors' exclusive use of quantitative measures and encourages auditors to document their thought process regarding materiality choices.
The purpose of materiality judgments and common benchmarks:
Purposes
Posting materiality is a data accumulation and judgment aid that assists the auditor in aggregating information about the potential materiality of misstatements.
Materiality is used to help the auditor plan the audit. If planning materiality is set too high, the auditor may not perform sufficient procedures to detect material misstatements in the financial statements. If planning materiality is set too low, more substantive procedures may be performed than necessary.
Benchmarks
If a client has significant and nonrecurring charges to nonoperating expenses, then income from continuing operations may be a more appropriate materiality benchmark than net income.
For companies with a net loss, auditors sometimes use net loss as the benchmark. If a company's net income varies significantly from year to year, the auditor might consider using an average of net income from the prior three to five years as the materiality benchmark.
For nonprofit entities, appropriate benchmarks would include total expenses, total revenues, or total assets.