Question

An auditor has determined a $10 million materiality level for a client's balance sheet and a $3 million materiality level for the client's income statement. As a result, the auditor will consider items in the audit to be material if they individually or collectively could result in a misstatement of____________.

A. $6.5 million or more
B. $10 million or more
C. Unknown; impossible to determine from information given
D. $3 million or more

Answer 1

Answer:

D. $ 3 million or more

Explanation:

Since the minimum materiality amount on individual basis is $3 million for client's income statement.

Therefore, whether it is on individually or collectively identified that there is misstatement of at least $3 Million the auditor will consider it material.

They will notify appropriate authorities regarding the misstatement.

Answer 2

Answer:

D. $3 million or more

Explanation:

The International Auditing Standards comments that it is advised in auditing that when there are multiple materialities in an audit, using an average of the materialities will lead to an amount that will be too large for the lower materiality that has been set.

Therefore in the case of this scenario, $6.5 cannot be used because it will be too large for the income statement amounts, hence the advised level is the lower materiality of $3 million.