When establishing the audit strategy, the auditor should determine materiality for the financial statements as a whole, performance materiality, and, when necessary, material ity levels for particular classes of transa ct ions, account balances, or disclosures.
The auditor should determine the material ity level for the financial statements as a whole. Misstatements, including omissions, are considered material if there is a substantial likelihood that, individually or in the aggregate, they would influence the judgment made by a reasonable user based on the financial statements.
The Supreme Court of the United States has held that a fact is material under federal securities laws if there is "a substantial likelihood that the ... fact would have been viewed by the reasonable investor as having significantly altered the 'total mix' of information available." The Supreme Court has also noted that determinations of materiality require "delicate assessments of the inferences a 'reasonable shareholder' would draw from a given set of facts and the significance of those inferences to him .... "
The following factors are used to make the preliminary assessment of materiality:
The application of a percentage to an appropriate financial statement benchmark. The financial statements used may be the entity's annualized interim financial statements or its prior period annual financial statements.
When identifying the appropriate benchmark to use to calculate materiality, the auditor should consider:
Whether there are financial statement items on which users focus their attention when evaluating the entity's financial position or performance.
The nature of the entity and its industry.
The size of the entity, the nature of its ownership, and its methods of financing.
Examples of materiality benchmarks, including total revenue, gross profit, profit before tax from continuing operations, and net assets.
Prior period financial results, period-to-date financial results and position, and current period budgets and forecasts.
Any significant known or expected changes in the entity's circumstances.
Changes in the conditions of the industry or the economy as a whole.
PCAOB standards state that separate lower materiality levels should be set for particular accounts or disclosures when there is a substantial likelihood that misstatements of amounts less than the materiality level established for the financial statements as a whole would influence the judgment of a reasonable investor.
Which of the following statements is not correct about materiality?