Planning the Audit - Initial Analytical procedures and Materiality Memo (P - 15)

As you continue with the preliminary planning for the audit, you need to perform the initial analytical procedures and determine the planning materiality for the financial statements as a whole and apply materiality at the account level (tolerable misstatement).

Ms. Dutra would like you to give your opinion on this topic. You will need to prepare a memo (P - 15) to accompany your workpapers explaining your conclusions and justifications for them.

• Go to the Eagle View Download Eagle ViewAnalytical Procedures and Materiality Workbook Download Analytical Procedures and Materiality Workbook(excel file) and complete the following tasks using the pre-formatted worksheets on the corresponding sheet :
  • Common size the balance sheet and income statement in the highlighted columns. Use the prior year information as your guide.
  • Determine the dollar amount and percentage change from the prior year for each account on the balance sheet and income statement.
  • Note any significant changes that you feel may be an indication of potential misstatement whether due to error or fraud.

Next, complete the following

• Calculate the Planning materiality for the financial statements as a whole. Select the benchmark(s) you feel would be best and document your rational in your memo. Be sure to justify your choice based on qualitative factors, such as the potential for fraud, complexity of operations, incentives for misstatements, or quality of the staff
• Next, determine the materiality for each balance sheet account. Explain your reasoning for the amount you chose and the overall impact on the audit (more or less work, different types of work, changes in the timing of testing, etc.).