Materiality Practice Questions

Lesson: Materiality Practice Questions

In this lesson, Nick Palazzolo discusses various practice questions related to materiality. He covers concepts such as quantitative and qualitative materiality, audit evidence, and the impact of materiality on financial statements. He provides examples and explanations for each question, including how to identify material misstatements and the significance of related party transactions. Additionally, he analyzes a scenario where an auditor must determine the appropriate adjustment for allowance for bad debts and explains the concept of materiality with a focus on its effect on a reasonable investor's decision-making process.

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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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I know materiality is a tough one, right? A lot of conceptual topics that we can't really talk about unless you were in the field, in the practice. But let's talk about some questions here. Well, first we have an auditor who has set materiality level for the financial statements as a whole at $125,000. Which of the following statements would the auditor most likely consider material? Good question. Reading through them, first what I'd like to see is that any of these questions, any of these answers have a number that is above $125,000. Because if it does, then yeah, I'd say that it's probably going to be material. But we look here and we see that all of these numbers are below 125. OK, so that's interesting. So it's not going to be quantitatively material, but one of these is going to have to be qualitatively material. Because from here, since all of the dollar amounts are lower, we're going to have to look at what the actual account is. Like what are we dealing with in each situation? We've got related parties, supplies, allowance for doubtful, and trade accounts payable. Now here, we're going to have to think, again, it's like which one of these is the best answer. This is just the nature of the audit exam as you're quite aware by this point. So here, which is most significant? Which would be most significant? And this is where you've got to put on your thinking cap for the entire exam. So if you think back to all the sections you've seen, which of these is most significant for us to make sure we disclose, to make sure it's properly stated on the financials? Well, I'm going to say that's going to be related party transactions.

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