Final answer:
Accuracy of the entity's financial records is not a qualitative factor that affects an auditor's establishment of materiality; rather, it's the result of the audit. Qualitative factors relate to the significance of the information, not just the precision of the financial records.
Step-by-step explanation:
The question refers to qualitative factors that affect an auditor's determination of materiality during an audit. Among the options provided, accuracy of the entity's financial records is not a qualitative factor influencing materiality; rather, it is an outcome of how materiality and audit procedures are applied. Qualitative factors generally refer to those that affect the significance of the information and not the precision of the measurement itself.
The qualitative factors that may affect an auditor's establishment of materiality include:
- Nature of the entity's business
- Financial position of the entity
- Irregularities in the object being measured
- Other factors that affect the outcome (highly dependent on the situation)
The correct answer is 4) Accuracy of the entity's financial records. The other options - 1) Size of the entity, 2) Nature of the entity's business, and 3) Financial position of the entity - are all qualitative factors that may affect an auditor's establishment of materiality.
The accuracy of the entity's financial records, on the other hand, is a quantitative factor that relates to the reliability and correctness of the financial information.