Final answer:
Materiality thresholds in audit engagements vary to accommodate the unique financial situations of different entities, ensuring relevance and precision in detecting significant misstatements. Materiality bases are chosen based on the context of the entity's financial data and stakeholder interests. A conservative approach is taken by using the smallest materiality base to plan rigorous audits and to account for the risk of management fraud, which can significantly affect financial statements.
Step-by-step explanation:
Different materiality thresholds are relevant for different audit engagements because each company or entity being audited has unique financial situations and operations which impact the significance of misstatements. For instance, a small misstatement in a large corporation might be immaterial due to the size of the entity, whereas the same misstatement can be significant in a smaller company.
Different materiality bases are considered when determining planning materiality to ensure that the threshold used is appropriate to the audit context. Factors such as the entity's financial performance, industry norms, and the interests of stakeholders can have a bearing on the selection of the materiality base, which may include net profit, total revenue, or total assets, among others.
The materiality base that results in the smallest threshold is generally used for planning purposes to ensure a conservative approach. This practice increases the likelihood that all potentially significant errors are detected and addressed, thereby reducing the risk of an incorrect audit opinion because material misstatements go undetected.
The risk of management fraud is considered when determining performance materiality because such fraud can have a significant impact on financial statements. Evaluating this risk helps to set a level of materiality that is sensitive to the possibility that management may manipulate financial results, intentionally misstate figures, or omit disclosures to present a misleading financial position or performance to stakeholders.