Anne Aylor Case - 1
Accounting 732
Audit II
9/25/2012
Anne Aylor Inc.
A. Why are different materiality bases considered when determining planning materiality?
Different materiality bases are considered when determining planning materiality because the magnitude and nature of financial statement misstatements or omissions have different influences on different financial statement users. For example, investors are more interested in the accuracy of numbers involving net income because they are mainly concerned with the company’s ability to increase shareholder wealth. For an audit company, the primary concern when planning materiality is to take into account all expected financial statement users. These different expected users all have different concerns in regards to where financial statements contain misstatements. Debtors such as banks who provide loans to help companies like Anne Aylor raise capital are mainly concerned with company’s maintaining debt covenants involving current assets. Anne Aylor has a debt covenant to maintain a current ratio over 2.0, which according to the company’s projected 2012 balance sheet, will not be met. These debtors are more concerned with Anne Aylor overstating assets or understating liabilities in order to meet these debt covenants and avoid potential interest rate changes.
B. Why are different materiality thresholds relevant for different audit engagements? Different materiality thresholds are relevant for each audit engagement because various industries contain more risk than others. Also, certain companies have varying amounts of risk due to their history of past misstatements and past year’s financial health of the company. For example, Smith & Jones uses different tolerable misstatement percentage thresholds that are based solely on the likelihood of management committing fraud. Donna Fontain, through conducting preliminary analysis has determined that risk of management fraud to be low, therefore according to
Audit II
9/25/2012
Anne Aylor Inc.
A. Why are different materiality bases considered when determining planning materiality?
Different materiality bases are considered when determining planning materiality because the magnitude and nature of financial statement misstatements or omissions have different influences on different financial statement users. For example, investors are more interested in the accuracy of numbers involving net income because they are mainly concerned with the company’s ability to increase shareholder wealth. For an audit company, the primary concern when planning materiality is to take into account all expected financial statement users. These different expected users all have different concerns in regards to where financial statements contain misstatements. Debtors such as banks who provide loans to help companies like Anne Aylor raise capital are mainly concerned with company’s maintaining debt covenants involving current assets. Anne Aylor has a debt covenant to maintain a current ratio over 2.0, which according to the company’s projected 2012 balance sheet, will not be met. These debtors are more concerned with Anne Aylor overstating assets or understating liabilities in order to meet these debt covenants and avoid potential interest rate changes.
B. Why are different materiality thresholds relevant for different audit engagements? Different materiality thresholds are relevant for each audit engagement because various industries contain more risk than others. Also, certain companies have varying amounts of risk due to their history of past misstatements and past year’s financial health of the company. For example, Smith & Jones uses different tolerable misstatement percentage thresholds that are based solely on the likelihood of management committing fraud. Donna Fontain, through conducting preliminary analysis has determined that risk of management fraud to be low, therefore according to