Video: Example of Materiality

In this lesson, Nick Palazzolo presents an example of materiality in auditing using the case of Mariah, a senior manager at Boulevard CPA firm. She is auditing Mahomes company for the year ended year five and expects a high likelihood of uncorrected and undetected misstatements. The lesson demonstrates the calculation of overall materiality and performance materiality based on firm guidelines, taking into consideration the likelihood of uncorrected and undetected misstatements. The lesson shows the step-by-step process of calculating materiality using given percentages and revenue figures, reinforcing the concept and preparing viewers to handle similar questions if encountered.

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Video Transcript

Instructor: Nick Palazzolo

Nick Palazzolo is head instructor of ExamPrep.ai CPA Review. Nick's teaching style is engaging & upbeat, combining practical Big 4 tax & assurance expertise with years of 1-on-1 coaching. His lessons are concise and emphasize what you need to know to pass. Whether you're a recent grad or working full-time, we’re confident you can conquer your CPA exams with Nick’s review.

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And we got another example. We are always trying to be transparent and provide clear examples. So here we go. We've got Mariah, who's the senior manager at Boulevard CPA firm, who is auditing Mahomes company for the year ended year five. Mariah expects a high likelihood of uncorrected and undetected misstatements. Based on firm guidelines, Mariah should use 1% of revenue. So this is just going to be given firm guidelines. Like I said, we use templates. We have firm procedures. The firm just says you should use 1% of revenue as the benchmark to calculate overall materiality. So this is how it would work in reality. In practice, firm guidelines require performance materiality to be calculated by multiplying the overall materiality by either 80% for low likelihood of uncorrected and undetected misstatements, or 60% if there's a high likelihood of uncorrected and undetected misstatements. Now, these likelihoods would be determined in planning. They'd be determined when we're talking about audit risk, and that's something we'll go over in the audit risk lesson. That would be determined by the audit team. So in this case, let's take a look. And in this case, we see we're using the 60%. So there's going to be a high likelihood of uncorrected and undetected misstatements. Let's see how it goes. Here's select financial information from Mahomes company. Here's the revenue for each quarter and then the total revenue for the entire year. Based on the information above, determine the appropriate performance materiality that Mariah should use. Pretty simple calculation. You just want to see it in action and be able to do this yourself. Will you see questions like this a lot? Probably not, but I would be familiar with how to do this because if you see one or two, it'll

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