Question

) Explain why it is necessary to allocate the preliminary judgment about materiality to individual accounts (segments) in the financial statements. Also explain why allocating to balance sheet accounts is more common than allocating to income statement accounts

Answer 1

Concept of Materiality:

Whether transactions/books of accounts are in comply with applicable standards and reflect true balances. This is the threshold above or below which the balances may not be true and may affect decision of readers of financial statements.

Allocating the preliminary judgement about materiality:

This is done in order to plan scope and extent of audit procedure to be applied to the individual accounts.

Allocating materiality to balance sheet items than to income statement:

This is because most income statement misstatements have an equal effect on the balance sheet because of the double entry bookkeeping system. So it is sufficient to apply it to balance sheet items.