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MATERIALITY LEVEL CALCULATION - EXAMPLE [email protected](1455780998)
How is materiality level calculated?
Account balance Balance Rate % Materiality level
Total revenue $ 50,000,000.00 0.25 $ 125,000.00
Total expenditure $ 38,000,000.00 0.25 $ 95,000.00
Total non-current assets $ 500,000,000.00 0.3 $1,500,000.00
Profit before income tax $ 20,000,000.00 0.5 $ 100,000.00
Equity $ 80,000,000.00 0.5 $ 400,000.00
How is materiality level selected?
Auditors typically choose the lowest amount which in this case is $95,000 as materiality level for this audit.
The $95,000 would typically be chosen as materiality level for audit of not-for-profit organisation.
However, auditors can also choose the $125,000 when auditing a for-profit organisation.
Using professional judgment, auditors decide to choose $125,000 in this example as materiality level.
How is materiality level applied?
Revenue account Accounts Payable
Account balance $ 50,000,000.00 Account balance $ 1,000,000.00
Number of transactions 10,000 Number of transactions 400
Sample size 400 Sample size 48
Tolerable errors 10 Tolerable errors 4
Number of errors found 8 Number of errors found 3
$ value of errors found $ 8,000.00 $ value of errors found $ 2,000.00
Projected back to population 200 Projected back to population 25#p#分页标题#e#
Projected back to population ($) $ 200,000.00 Projected back to population ($) $ 16,666.67
How are test results evaluated?
Revenue account
Sampling test done on revenue account balance a projected 200 errors on population of 10,000 transactions.
The total $ value of the projected errors is $200,000. As this amount is more than the $125,000 materiality level, auditors
recommend management to correct the errors and adjust the account balance. If management refuses to correct
the errors, the audit may issue a qualified audit opinion as the revenue account balance is materially misstated.
Accounts payable
Sampling test done on Accounts Payable balance shows a projected 25 errors on population of 400 transactions.
The total $ value of the projected errors is $16,667. As this amount is less than the $125,000 materiality level, auditors
conclude the test result as satisfactory.
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