Preliminary Judgment about Materiality

Client:
Balance Sheet Date:
Prepared by:

Quantitative Considerations: Because materiality is relative, it is necessary to have bases for

establishing whether misstatements are material. A base is a critical item of which users tend to
focus while making decisions. The base will vary depending on the nature of the clients
business. Typical bases may include net income before taxes, net sales, total assets and
stockholders equity. Percentages typically range from 1%-10% depending on the base.
Base (from previous
year)
Net income before
taxes
Total Assets
Net Sales

Dollar Amount of
Base
$408,000

Percentage Range

Base x Percentage

3%-6%

$12,240- $24,480

$3,268,000
$ 10,754,000

1%- 3%
1%- 3%

$36,280- $108,840
$107,540-$322,620

Qualitative Considerations: Certain types of misstatements are likely to be more important to

users than others, even if the dollar amounts are the same. For example, misstatements that
involve fraud may be more important to users than misstatements due to unintentional errors.
Fraud reflects on the integrity of management and other employees of the client.
Item to be Considered
Outdated accounting system
New Client previous year qualified opinion

Impact on Materiality (Increase or Decrease)

Reduce/Decrease
Reduce/Decrease

Preliminary Judgment about Materiality: Combine the quantitative and qualitative considerations
into one overall materiality level.
Materiality level:

$50,000