Question

7. Which of the following is not true regarding the preliminary judgment of materiality?

Please add checkmark next to the correct answer(s).

1It represents the largest amount of potential misstatement that would not affect the decision of a user.

2The preliminary judgment of material is based on applying an appropriate benchmark to an appropriate base.

3Determining the preliminary judgment does not require auditor judgment.

4Income before taxes is generally the appropriate benchmark for for-profit entities.

5Qualitative factors are important in the evaluation of materiality.

Answer 1

Answer: 4

Materiality indicates the amount of misstatement in the financial statements which changes the decision making of the users. The users may be misguided by such misstatement. If it is in preliminary judgment, the auditor still believes that such misstatement doesn’t affect users’ decision.

Therefore, this is completely an auditor’s judgment.

Other options are not correct:

Option 1: It satisfies the above definition.

Option 2: Appropriate benchmark is required.

Option 4: Income may serve as quantitative benchmark.

Option 5: Qualitative factors, like market sentiment, reputation, etc, are important here.