In planning a December 31, 1999 year end audit, you note that for the 1998 engagement your firm's assessment of audit risk was high, and the preliminary estimate of materiality, $1,200,000, was allocated to balance sheet accounts based on the standard deviation of recorded transactions within each unaudited account. Owing to the design of a new accounting information system and improved control procedures—both supervised by your firm's management consulting division—you judge that, unlike 1998, the risk in 1999 that material errors or irregularities could occur and not be prevented by the internal control structure is now well below the maximum.

Required:

1. In comparison to 1998, will the 1999 preliminary estimate of materiality likely be higher or lower? Discuss.

2. What is the purpose of the preliminary estimate of materiality? Discuss.