Which of the following would an auditor most likely use in determining the auditor’s preliminary judgment about materiality?
A. Financial results of firms in the same industry.
B. The anticipated sample size for planned substantive tests.
C. The entity’s financial statements of the prior year.
D. The assertions that are embodied in the financial statements.
Answer:C
C is corrent. Auditors often choose to use a measure relating to the prior year’s financial statements (e.g., a percentage of total assets, net income, or revenue) to arrive at a preliminary judgment about materiality.
A is incorrect because materiality is based on the magnitude of an omission or misstatement of the client’s financial statements, not financial statements of other firms.
B is incorrect because while an auditor’s materiality judgment will affect the anticipated sample size for planned substantive tests, sample size does not affect the materiality judgment.
D is incorrect because the assertions embodied in the financial statements remain the same from one audit to another.