Often in an audit, total combined tolerable misstatement is greater than overall materiality. Why is this the case?
What will be an ideal response?
Answers may vary, but could include:
1. Not all accounts will be misstated by the full amount of their tolerable misstatement allocation.
2. Audits of the individual accounts are conducted simultaneously. If accounts were audited sequentially, unadjusted misstatements observed during testing would count against materiality and, theoretically, the auditor could carry the unused portion of materiality to the next account, and so forth.
3. When control weaknesses or misstatements are identified in an account, the auditors typically perform additional procedures in that and related accounts. Thus, the actual testing will often achieve a much smaller margin for misstatement than planned tolerable misstatement.
4. Overall financial statement materiality serves as a "safety net." If individual misstatements in accounts are below their tolerable misstatement, but the aggregate of the misstatements is greater than materiality, an adjustment will need to be made.
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