Question

An auditor has determined a $10 million materiality level for a client’s balance sheet and a $3 million materiality level for the client’s income statement. As a result, the auditor will consider items in the audit to be material if they individually or collectively could result in a misstatement of:

Answer 1

The correct answer is $3 million or more.

Step-by-step explanation:

Materiality is the figure or figures determined by the auditor that indicate the possible inaccuracies or material errors in the financial statements as a whole and in certain types of transactions, accounting balances or disclosures. Such a figure is the result of the base, for example before-tax profits, by the percentage, for example 5 to 10% and can influence the decision making of stakeholders.

Therefore, a figure that exceeds the level of materiality or relative importance will be considered material, as it affects the decisions of managers and shareholders.