Steve and Tony, two audit managers working on the audit of JCL Enterprises are discussing materiality. Steve and Tony are relatively inexperienced audit managers and this is the first time they have been responsible for the day-to-day operations of a clients audit. One of the staff associates approaches them and advises that she has been asked a question by one of the clients internal auditors pertaining to materiality and is unsure how to answer. The question pertained to how the auditors would know when something should be considered material and investigated further and/or disclosed accordingly. Steve and Tonys most appropriate response to this question would be to advise which of the following?

o Audit materiality, per generally accepted auditing standards, is determined with reference to a strict percentage, and based on the clients total assets. In most cases, 3% of total assets is considered to be the threshold for materiality.

o The question of when something is likely to be considered material by the auditors pertains less to the dollar amount and more toward whether knowledge of the item would cause a reasonable informed person to perhaps act or decide differently based on this information.

o The internal auditor appears to be referring to overall planning materiality. The audit staff associate should advise the internal auditor that this level of materiality is set jointly between the external auditor and the clients board of directors.

o When attempting to set a threshold or bench mark for materiality, the auditors will typically select accounts from the statement of cash flows, as this represents the best and most accurate measure of the actual cash the company is receiving and disbursing each period.