Materiality calculation - comments appreciated. 619



  • G’day all.%0AHere’s the issue. We need to determine what our threshold for Significant Deficiency is. Actually, we’ve defined it but our auditors are suggesting it’s too high… but not providing any rationalle for their reasoning.%0AAnyway, here is what we’ve calculated. Any comments on any of the numbers will be appreciated.%0APlease note, for the purposes of this post, I am not considering the ‘qualitative’ factors that could result in a Significant Deficiency or Material Weakenss. We are, of course, considering these in our project.%0ACompany is forecast to make 1.4billion after tax earnings. Stable company so let’s assume that is a reasonable figure to work from.%0AUsing the ‘rule of thumb’ we’ve identified our materiality as 10% of after tax income thus USD140 million. To take into account the potential for unidentified errors we’ll reduce the 140 and take only 70% of materiality to arrive at 98 million but for ease we’ll use USD100 million as our materiality amount.%0ATherefore any error that could result in a misstatement of =>100million will automatically be considered a material weakness. This is also essentially the same as what our auditors have defined as financial statement materiality.%0ANow we need to determine what a significant account is and what would constitute a Significant Deficiency. Using the ‘Framework for Evaluating Control Exceptions and Deficiencies’ (pg 15) we find that misstatements => 20% of overall annual financial statement materiality (the USD100MM calculated above) are defined as ‘more than inconsequential’ and therefore are classed as a Significant Deficiency. %0A20% x 100mm = USD20mm%0AWe have then taken this Significant Deficiency threshold of USD20mm and used that as our scoping number. Any account (with a balance of less than USD20mm or that does not have the potential to cause an error of USD20mm or more is determined to be immaterial.%0AIn summary:%0AUSD1,400mm after tax earnings%0AUSD100mm materiality level / material weakness threshold%0AUSD20mm significant account / significant deficiency threshold %0AOur auditors are suggesting the USD20mm be reduced to USD5mm. They do agree with the USD100mm materiality level.%0AAny comments??? Anyone willing to share their numbers???%0AAll thoughts and comments appreciated.%0AThanks%0AChris.



  • My company operates with a GBP1.5mm significant account
    Our net operating value is ~GBP1,000mm.



  • We were told it should be in the few millions, seperate or aggregated together. External Audit will not give you a specific number as there are varied factors that come into play… It’s an analytical dream area…
    Seperate 1 - 2 hundred thousand, depending on the exception, risk… low med or high, then play in the Management Response the Potential Magnitude: Impact is Low, Likelihood is Low. Magnitude of the impact is minimal. Then there is the Complementary or Redundant Controls:
    Compensating Controls, then there is the Conclusion: ‘The control is ineffective, however compensating controls will prevent any impact to financial statements’ after all that… BUT then you get into aggregating all the exceptions (or deficient controls) and play the game again…
    aggregated we play by a few million, seperate a few hundred thousand…You can also throw back to external auditiors the legal mumbo jumbo they like
    ‘Considering the overall compensating controls (described below) and the De minimis magnitude of the potential error as described above, further mitigating controls provide additional assurance that this control deficiency results in no more than an De minimis impact to the financial statements. The following control strongly mitigates any potential error’… enjoy



  • %0AIn summary:%0AUSD1,400mm after tax earnings%0AUSD100mm materiality level / material weakness threshold%0AUSD20mm significant account / significant deficiency threshold %0AOur auditors are suggesting the USD20mm be reduced to USD5mm. They do agree with the USD100mm materiality level.%0A %0AI would expect that the threshold for a significant weakness to be 10% of the material threshold - so in your case USD10 million.%0AI agree with your rationale in getting to USD100 million for material weakness.



  • We have been using 20% of materiality to quantify ‘inconsequential.’ This was derived from ‘A Framework for Evaluating Control Exceptions and Deficiencies’ Version 3, December 20, 2004 (see Terminology section). I thought this was pretty straightforward based on reading the framework, so I’m surprised to see this becoming an issue. What is the basis for your auditors refuting the 20%?



  • Just a comment:
    The Framework for Evaluating Control Exceptions and Deficiencies
    was developed by representatives of the following nine firms:
    BDO Seidman LLP, Crowe Chizek and Company LLC, Deloitte and Touche LLP, Ernst and Young LLP, Grant Thornton LLP, Harbinger PLC, KPMG LLP, McGladrey and Pullen LLP, PricewaterhouseCoopers LLP.
    Must be read in conjunction with Auditing Standard No. 2, An Audit of Internal Control Over Financial Reporting Performed in Conjunction With an Audit of Financial Statements.
    Download:
    aicpa.org/cpcaf/download/Framework – Version 3.pdf
    At the end of this document (pages 19-22) there are 4 excellent charts.
    Pages 5-18:Explanations in order to understand the charts
    HIGHLY RECOMMENDED


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