Question: 1a Some common numerical thresholds and benchmarks for overall materiality

1a. Some common numerical thresholds and benchmarks for overall materiality judgments are 5% of net income and 1% of assets. The materiality level at which items are considered clearly trivial-a materiality level where the auditor believes errors below that level would not, even when aggregated with all other misstatements, be material to the financial statements-is generally 5% to 10% of overall materiality.
Calculate these numerical thresholds for Ford and Toyota, assuming 5% for misstatements considered clearly trivial.
1b. Assume that you discover a $10,000,000 error in inventory.
What difficulties would you encounter in deciding whether or not that amount was material?
1c. The numerical thresholds differ across the two companies. Why does that present a problem for the auditor? For third-party users?
1d. What is the SEC's position on the use of numerical thresholds?
1e. What other characteristics of potential misstatements should auditors consider when evaluating their materiality?
2a. What does the term netting mean in the context of misstatement judgments?
2b. What is the SEC's guidance concerning netting?
2c. Why is it helpful to financial statement users to have companies avoid netting?

  • CreatedSeptember 22, 2014
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