Question: During an audit, an audit is required to establish performance materiality for several balance sheet accounts. Explain/justify how you would choose the performance materiality amounts
During an audit, an audit is required to establish performance materiality for several balance sheet accounts. Explain/justify how you would choose the performance materiality amounts for each of the following accounts: (a) accounts receivable, (b) allowance for bad debt, (c) accounts payable.
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To establish performance materiality for various balance sheet accounts during an audit you must assess the risk and significance of misstatements for each account Performance materiality is essentially a threshold set below the overall materiality for the financial statements and it is used to ensure that significant misstatements are detected Lets address each account separately a Accounts Receivable 1 Assess Risk of Material Misstatement Determine the inherent and control risks associated with accounts receivable This may include considering factors such as the clients history of collecting receivables the age of the receivables and the effectiveness of the clients credit and collection process 2 Relevance and Size As accounts receivable is usually a significant figure on the balance sheet it is typically assigned a lower performance materiality due to its direct impact on a companys liquidity and working capital 3 Audit Evidence Consider areas where judgment is involved such as estimates or complex transactions which may raise the likelihood of misstatements A thorough review of the aging analysis direct confirmations and subsequent cash receipts is essential ... View full answer
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