[kikefuentez]

Hi,

I’m writing regarding to the AUD material from Becker’s Review, Chapter 2, Module 6 (Materiality). There is a question (Q CPA-04685) that provides an answer, but it gets me confused the response. I believe the response is other than the answer selected (per the explanation). Provides a correct answer for $98k but below shows the calculation of the answer for $70k.

Please can someone advise if this was an error in the selection of the answer or I am not understanding the explanation. I would appreciate any response regarding this matter.

Thank you,

Question CPA-04685:

Tracy, senior accountant at JFM CPA Firm, is determining the performance materiality for her client in Year 2. Tracy expects that there will be a high likelihood of uncorrected and undetected misstatements.

JFM CPA Firm’s materiality guidelines advise the auditor to set performance materiality in the range of 50% to 70% of overall materiality based on the likelihood of misstatement. Tracy has calculated overall materiality at $140k.

Tracy will most likely set performance materiality closes to:

Correct answer: A) $98,000

Choice “A” is correct.

$140k (overall materiality) X 50% (lower range provided in audit firm guidance) = $70,000. Tracy believes that there is a high likelihood of uncorrected and undetected misstatements. Therefore, Tracy most likely will use a percentage closer to the lower end of the range provided in firm guidance. Generally, if there is a high likelihood of misstatements then auditor sets materiality at a lower amount, which results in the auditor looking closer at audit evidence.

[Earla Riopel (NYCARE)]

Hi,

I am not sure what edition of Becker textbook you are using. But according to my old hard copy of Auditing & Attestation Becker textbook (2008 edition), Chapter A5-8 – Audit Sampling – III Sampling in Tests of Controls: Attribute Sampling; Item ‘C'- Deviation Rate versus Tolerable Rate. One of the ‘pass key' boxes says,

“Students often mistakenly that the sample deviation rate also should be used as the estimated error rate in the total population…There are statistical formulae that determine whether the actual range is 68 to 72, 60 to 80, or something different, and there are tables available that provide the “TOP END” of the range (in your case 50% to 70%)…(As conservative auditors, we are concerned with the worst case scenario, so we generally don't bother with the low end of the range.) The top end of the range is formally known as the “UPPER DEVIATION RATE”.” ~ Becker textbook

So, in this case $98k is the upper deviation rate ($140k x 70%). Thus, Letter ‘A': $98k is the correct answer.

Now, don't get confused with this AUD question to FAR topic/question (or maybe AUD or Blaw) regarding ‘loss contingency'. This is more on a lawsuit brought by a plaintiff and the company is the defendant. Defending on probability, the chances of incurring loss can be either ‘remote' or ‘probable'. A range of damages will be estimated by client's lawyer, a ‘probable' estimate will result to choosing the “LOW END” of the range. This low end range of damages estimated must be accrued at the financial statements, as lawsuit loss. Rule of Conservatism.

Hope this answer your question. If not, you can always contact Mr. T. Gearty or Mr. P. Olinto. They are two of the authors of the 2008 Edition Auditing textbook and the most recent ones.

[Andrew808]

I had this same problem as I believe the becker answer is programmed incorrectly into the study program. I also believe that @Earla is looking at this question through the wrong lens as the upper deviation rate (sample deviation rate + allowable sampling risk) is only applicable to Attribute Sampling.

Sorry if I butcher this but i'll do my best to communicate how I interpret this question….

Becker says the Performance Materiality is the amount set to REDUCE the probability that the aggregate of uncorrected/undetected misstatements exceed materiality for the FS as a whole.

If you think about it logically, when there is a HIGHER risk of material misstatement, the auditor is willing to accept LESS risk. Therefore, the auditor would set performance materiality at 50% due to the HIGH likelihood of misstatement as noted in the question.

Big picture, the auditor wants to provide reasonable assurance that the financial statements as a whole are presented fairly in all material respects. So if there's a HIGH risk of misstatement, then the LOWER $$ amount of uncorrected/undetected misstatement will be accepted by the auditor to provide reasonable assurance…etc

Hope this helps/makes sense!

[Earla Riopel (NYCARE)]

Hi there,

The three of us are definitely right in our own way. Becker Q/A are mis-match (errata?).

I gave you a scenario on why the answer is $98k and @Andrew808 gave an answer of $70k.

During the CPA exam, if the question is asking for audit risk & materiality, pick $70k, if the question is asking for upper deviation rate, pick the highest rate range. Know when to use Variable vs. Attribute Sampling.

Thanks guys.

[Author]

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