Question

Which of the following is not a qualitative factor that may affect an auditor's establishment of materiality?

A. Potential for fraud.
B. The company is close to violating loan covenants.
C. Firm policy sets materiality at 4% of pretax income.
D. A small misstatement would interrupt an earnings trend.

Answer 1

The answer is C. Firm policy sets materiality at 4% of pretax income.

Step-by-step explanation:

The correct answer is C. Firm policy sets materiality at 4% of pretax income.

Materiality is a concept used by auditors to determine the significance of an error or omission in financial statements. It helps auditors decide what level of misstatement or omission would affect a user's decision-making. In this case, the materiality is already predetermined by the firm's policy and is not a qualitative factor considered by the auditor.

Qualitative factors that may affect an auditor's establishment of materiality include potential for fraud, violation of loan covenants, and interruption of earnings trend.