Materiality in AS5 2315

  • We are a currently in our first year of SOX and we need to set our materiality level for scoping purposes. When I inquired with the auditors, it was suggested that materiality is set at the amount that would move our EPS by USD0.01. If this is the case, then almost every account would be material w/ WASO of 20M, everything > USD150k would move EPS.
    For those who are in the small co bucket, how have you defined your sox planning materiality?

  • There are many ways to calculate materiality for SOX purposes, but it’s most important that Management of your company agree with your auditors rather than allowing the auditors to dictate. In our case, we chose to use 5% of pretax income as our basis for materiality. This decision was the result of long discussions, both internally and externally with our auditors, regarding what made the most sense for our particular application. One word of advice: don’t paint yourself into a corner with an unrealistic approach simply because your auditors have suggested it. Be sure to push back some.

  • There are a number fo ways you could do this, but the most common are as a %age of turnover, net profit or net assets.%0AYou could also take an approach that says line by line the level of coverage you have to a point that management is comfortable.%0AMore aggressively you could take a risk management type approach and say that you’ll only look at accounts beyond a certain level of risk.%0AIn the end of the day, as management you are not bound by AS5 - the auditor is.

  • Hi,%0AThe article cited below is from the AICPA and might be insightful to help you to determine planning materiality for SOX purposes at your company.%0Awww dot aicpa dot org/pubs/jofa/may2005/vorhies.htm%0AThe materiality threshold of 5% is discussed in detail along with other approaches and considerations.%0AHope this helps,%0AMilan

  • Look at accounts beyond a certain level of risk’ the AS5 give the auditor more fields for professional judgment. When defining witch account is relevant or not, you should not consider only materiality, but also the risk assessment.%0AI have heard from a Big 4 auditor that you can leave a material account if there isn’t relevant risk. In other words, you can base only on your risk assessment.%0AI prefer to consider all relevant account an aggregate those with relevant risk. By the way, we chose 5% of pretax income, with a haircut of 75% (pretax income of USD 2000, than the overall materiality would be USD 100 and a individual account materiality of USD 75).

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