The concepts of materiality and pervasiveness are important to auditors in examinations of financial statements and expressions of opinion on these statements.
How will materiality influence auditors’ reporting decisions in the following circum-stances? In your response, consider both the matter’s materiality and pervasiveness.
a. The entity prohibits confirmation of accounts receivable, and sufficient and appropriate evidence cannot be obtained using alternative procedures.
b. The entity is a gas and electric utility company that follows the practice of recognizing revenue when it is billed to customers. At the end of the year, amounts earned but not yet billed are not recorded in the accounts or reported in the financial statements.
c. The entity leases buildings for its chain of transmission repair shops under terms that qualify as capital leases under ASC 840. These leases are not capitalized as leased property assets and lease obligations.
d. The entity has lost a lawsuit in federal district court. The case is on appeal in an attempt to reduce the amount of damages awarded to the plaintiffs. No loss amount is recorded.