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The Specific Thresholds For Significant Accounts

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Messikh Sarah
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6 views

The Specific Thresholds For Significant Accounts

Uploaded by

Messikh Sarah
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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The specific thresholds for significant accounts

The specific thresholds for significant accounts can vary depending on the auditors' professional
judgment, the nature of the entity being audited, and applicable auditing standards.

General considerations for determining the specific thresholds:

Size and Significance:


Accounts with larger balances or those that have a significant impact on the financial statements are
typically assigned lower materiality thresholds. For example, accounts such as total assets, total
liabilities, or net income may have lower thresholds due to their significance in portraying the
financial position and performance of the entity.

Risk Assessment:
Accounts associated with higher inherent risks or that are more susceptible to material misstatement
are often assigned lower materiality thresholds. This includes accounts that involve complex
transactions, estimates, or judgments, as well as accounts with a history of errors or irregularities.

Regulatory Requirements and Industry Norms:


Certain industries or regulatory bodies may have specific requirements or guidelines for determining
materiality thresholds. Auditors take these requirements into consideration when setting the
thresholds for accounts within those industries.

Qualitative Factors:
Apart from quantitative considerations, auditors also evaluate qualitative factors when determining
materiality thresholds for accounts. This includes factors such as the nature of the entity's
operations, its competitive environment, and the expectations of users of the financial statements.

Formulas and examples, related to specific thresholds for significant accounts:

Tolerable Misstatement:
Tolerable Misstatement represents the maximum amount of error or misstatement that is
acceptable in an individual account or balance without impacting the fairness of the financial
statements. It is often expressed as a percentage of the materiality threshold.

Formula:

Tolerable Misstatement = Materiality Threshold x Tolerable Misstatement Percentage

For example, let's assume the materiality threshold for a specific account is determined to be
$200,000, and the auditors set a tolerable misstatement percentage of 5% for that account. The
calculation would be as follows:

Tolerable Misstatement = $200,000 x 5% = $10,000

In this case, the auditors would consider any misstatement in the account amounting to $10,000 or
more as significant and requiring further investigation.
Performance Materiality:
Performance Materiality is set at a lower level than the overall materiality threshold and is used to
determine the extent of audit procedures performed on individual account balances or transactions.
It allows auditors to allocate resources and efforts based on the perceived risks and significance of
specific accounts.

Formula:

Performance Materiality = Materiality Threshold x Performance Materiality Percentage

For example, if the materiality threshold is determined to be $500,000, and the auditors set a
performance materiality percentage of 50% for a specific account, the calculation would be as
follows:

Performance Materiality = $500,000 x 50% = $250,000

In this case, the auditors would perform audit procedures to ensure that misstatements in the
account are detected if they exceed $250,000.

Account-Specific Threshold:
In some cases, auditors may set specific thresholds for individual accounts based on their significance
or risk. These thresholds are determined by considering factors such as the nature of the account,
historical misstatement levels, and professional judgment.

Formula:

Account-Specific Threshold = Materiality Threshold x Account-Specific Threshold Percentage

For example, if the materiality threshold is determined to be $1 million, and the auditors set an
account-specific threshold percentage of 10% for a specific account, the calculation would be as
follows:

Account-Specific Threshold = $1,000,000 x 10% = $100,000

In this case, any misstatement exceeding $100,000 in that specific account would be considered
significant and require further investigation.

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