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 percent of pretax income.
d- A small misstatement would interrupt an earnings trend.

Answer 1

The qualitative factor that is NOT relevant to an auditor's establishment of materiality is a firm policy setting materiality at 4 percent of pretax income.

Step-by-step explanation:

The qualitative factor that is NOT relevant to an auditor's establishment of materiality is c- Firm policy sets materiality at 4 percent of pretax income. Materiality is a concept used in auditing to determine the significance of an error or omission in financial statements. It is based on the nature and size of the financial statement item, as well as the financial statements as a whole. While factors such as potential for fraud, violations of loan covenants, and interruption of earnings trends are considered when establishing materiality, a firm policy setting materiality at a specific percentage is not a qualitative factor.