Determine the preliminary judgment about materiality for the client as a whole. Express your answer as a dollar amount. Determine the appropriate level of materiality based on all analyses completed for the client thus far. Fully support and discuss the materiality level that you determine.

Quantitative Considerations: Because materiality is relative, it is necessary to have bases for establishing whether misstatements are material. A base is a critical item of which users tend to focus while making decisions. The base will vary depending on the nature of the client's business. Typical bases may include net income before taxes, net sales, total assets and stockholders' equity. Percentages typically range from 1%-10% depending on the base.

Base (from previous year)

Dollar Amount of Base

Percentage Range

Base x Percentage

Net Income before taxes

408,000

3%-6%

408,000*0.03=12,240

408,000*0.06=24,480

Total Assets

3,628,000

1%-3%

3,628,000*0.01=36,280

3,628,000*0.03=108,840

Net Sales

10,754,000

1%-3%

10,754,000*0.01=10,754

10,754,000*0.03=322,620

Qualitative Considerations: Certain types of misstatements are likely to be more important to users than others, even if the dollar amounts are the same. For example, misstatements that involve fraud may be more important to users than misstatements due to unintentional errors. Fraud reflects on the integrity of management and other employees of the client.

Item to be Considered

Impact on Materiality (Increase or Decrease) Explain your answer

Outdated accounting system

New client

Previous year qualified opinion

Preliminary Judgment about Materiality: Combine the quantitative and qualitative considerations into one overall materiality level.

Materiality level:

$