Final answer:
Auditors do not use a standard checklist for materiality judgement; rather, they make decisions based on professional discretion and subjective evaluation of what is significant to the financial statement users. The correct answer is false.
Step-by-step explanation:
It is false that auditors usually make the materiality judgement by referring to a standard checklist. Materiality judgement in auditing is a matter of professional discretion rather than a fixed rule that can be followed through a checklist. The concept of materiality is relevant because it pertains to the significance of financial information's impact on the users of financial statements.
Materiality is an essential part of auditing as auditors must determine what is significant enough to affect the decisions made by the users of financial statements. Since materiality involves evaluating the relative importance of transactions and balances, auditors rely not on a checklist, but on their professional judgement, considering factors such as the size, nature, and context of financial items. This judgement varies depending on the circumstances surrounding the audit and the entity being audited.
The subjectivity inherent in materiality judgements arises due to the lack of a universally applicable threshold. Thus, auditors must consider both quantitative and qualitative factors when assessing materiality. These factors typically include percentages of profit, turnover, total assets, or equity, and may be influenced by the auditor's understanding of the financial statement users' needs.
For example, a small error in a large corporation may not be material because it does not affect the user's decision-making process; however, the same error in a smaller firm could be significant. Auditors must also think about what an average prudent investor would consider important in making an investment decision.
In conclusion, auditors use professional judgement based on specific criteria relevant to the client's business and industry to assess materiality, rather than a one-size-fits-all checklist. The goal of materiality judgement is to identify misstatements that could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements.