Question

1 In the audit of sales account, the amount presented on the financial statement is $5,000,000. You are the auditor and you have determined the level of materiality of sales account to be $50,000.

Required:

a. Based on your understanding, how would the auditor have done to determine this amount (You answer should only explain how the auditor actually does in order to determine this amount).   

Answer 1

The auditing standards requires the auditors to quantify the planning materiality. Planning materiality is the estimation of materiality of financial statements. There are a range of percentages for differencmt financial statements items viz for revenues, assets, liabilities, expenses, earnings, etc. In case of revenue it is generally around 0.5-1% of the total revenue. Thus since sin the given case Sales if it form of revenues the auditor has chosen 1% of the total sales Ie $ 5000,000. Hence he has determined the materiality as 5000,000*1% = $ 50,000.