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A senior accountant at a public accounting firm is determining materiality levels for their audit...

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Accounting

A senior accountant at a public accounting firm is determining materiality levels for their audit client. They expect there will be a low likelihood of uncorrected and undetected misstatements.

The firms materiality guidelines are as follows:

  • Auditors should calculate overall materiality based on the benchmark of either total assets or gross revenue, whichever is larger. Auditors should multiply the appropriate benchmark by either 1% (total assets) or 0.5% (gross revenue).
  • Auditors should calculate performance materiality by multiplying the overall materiality by either 70% (low likelihood of uncorrected and undetected misstatements) or 50% (high likelihood of uncorrected and undetected misstatements).
  • Auditors should calculate posting materiality by multiplying the overall materiality by either 5% (low likelihood of uncorrected and undetected misstatements) or 3% (high likelihood of uncorrected and undetected misstatements).

Selected Financial Information:

  • Revenue: $2,500,000
  • Gross Profit: $50,000
  • Total Assets: $1,750,000
  • Stockholders Equity: $750,000

Calculate overall materiality, performance materiality, and posting materiality.

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