Case Study: Anne Aylor, Inc.

Case Study: Anne Aylor, Inc.

Holli Eichelberger

Rasmussen College

Author Note

This paper is being submitted on August 19, 2015, for Drew Dresden’s A340 Advanced Auditing Concepts and Standards course.

Case Study: Anne Aylor, Inc.

* [a] Why are different materiality bases considered when determining planning materiality?

When determining planning materiality, it is important to consider the expected user of the financial statements. Whether or not a financial statement misstatement is relevant depends on the end user. A creditor may consider a 3 percent misstatement of net income to be material, and a stockholder may consider the same misstatement to be immaterial.

* [b] Why are different materiality thresholds relevant for different audit engagement?

Materiality thresholds are different for each audit engagement because each business is different. The auditor needs to consider the type and size of the business as well as the risk of management fraud. The auditor should use his or her best judgement when determining the materiality threshold for each individual audit engagement.

* [c] Why is the materiality base that results in the smallest threshold generally used for planning purposes?

Planning materiality should be based on the smallest materiality threshold to ensure that the financial statements as a whole do not contain material misstatements. A financial statement misstatement will affect both a balance sheet account and an income statement account. The auditor needs to plan the audit to find the smallest amount of a misstatement that will affect the decisions and opinions of the users of the financial statements.

* [d] Why is the risk of management fraud considered when determining performance materiality?

If it is likely that management fraud exists, performance materiality should lowered because the auditor needs to examine the misstatements more closely. When the likelihood of fraud is high, the auditor should not...