Make a preliminary judgment about

material.

8-1
8-2
 WHAT IS THE PRELIMINARY JUDGEMENT ABOUT
MATERIALITY?

Maximum amount by which the auditor believes the

statements could be misstated and still not affect the
decisions of reasonable users.
Set early and subject to change.
No guidelines. Most difficult.
Professional judgment: prior experience, knowledge of
industry, observation, knowledge or amounting, auditing and
client, industry standard.
Inverse relationship with evidences
8-3
 MATERIALITY FOR FINANCIAL STATEMENTS
AS A WHOLE
Step 1 in is to set materiality for the financial statements as a
whole as part of the planning process.
Factors Affecting Preliminary Materiality Judgment:

1. Materiality is a relative rather than an absolute concept.

2. Benchmarks are needed for evaluating materiality.

3. Qualitative factors also affect materiality.

8-4
 (1)

Materiality is a relative rather than an

absolute concept.
• Is P100, 10,000, 100,000 or 1,000,000 material?
• It all depends.
• Are you dealing with a small local company or Apple Computers?
• No specific figure.
• Back to professional judgement.

5
 (2)

Benchmarks are needed for evaluating

materiality.

• 3 to 5% Earnings before taxes.

• How about Tesla?
• 2 % of revenue.
• Works well with Amazon
• Gross profit percentage. Traditional retail company. FMCG
• 3 year Average income

6
 (3)

Qualitative factors also affect

materiality.

• Violation of loan covenant. WC, CR

• Slight loss to slight profit
• B/E earnings
• Management incentive. Bonus
• Stock market pressure
• Risk of bankruptcy
• Fraud. Always important even for small amount.

7
POLICY GUIDELINES OF A CPA FIRM.