Auditing Case 5.6

Case 5.6

Part A

[1] According to AS5:

[a] What should the auditor consider when determining whether an account should be 
considered significant?

First, the auditor should consider planning materiality from a quantitative standpoint. Generally, accounts that exceed planning materiality should be significant.

Second, the auditor should consider some qualitative factors:

* Size and composition of the account;

* Susceptibility to misstatement due to errors or fraud;

* Volume of activity, complexity, and homogeneity of the individual transactions processed through 
the account;

* Nature of the account;

* Accounting and reporting complexities associated with the account;

* Exposures to losses represented by the account;

* Likelihood of significant contingent liabilities arising from the activities represented by the account;

* Existence of related party transactions in the account, and

* Changes in account characteristics from the prior period. (AS5, Para 29)

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[b] What qualitative factors might cause an account that is otherwise relatively small quantitatively to be considered significant?

* Easily misstated due to errors or fraud;

* High volume of activity;

* Complex in nature;

* Include significant activity (e.g., cash, work in process, suspense accounts) ;

* High possibility of significant contingent liabilities;

* Large portion of related-party transactions;

[c] What qualitative factors might cause an account that is greater than materiality to be considered not significant?

* Low susceptibility to errors or fraud;

* Low volume of activity;

* High homogeneity;

* Not complex;

* Has been thoroughly tested in the recent past;

[2] Referring to Delmoss Watergrant's policy for identifying significant accounts (see Appendix A) as well as Sarbox Scooter's consolidated balance sheet and income statement, answer the following questions:

[a] Determine a...