Different users for different intents to utilize fiscal information. Not all parts of the fiscal statements are every bit relevant to all users. For case. shareholders are more concerned with net income growing and gross than creditors. Materiality is a comparative instead than an absolute construct. Based on different operation environment. the materiality threshold will change to act upon users of the fiscal statement. For illustration. the magnitude of a misstatement that will act upon users of the fiscal statement will alter based on how the entity is executing in the industry. Most misstatements affect both a balance sheet an income statement history due to the double entry method. So. hearers must plan a audit program to observe the smallest misstatement that will act upon users of the fiscal statement.
A hazard of direction fraud will impact straight the accounting sum. such as net income. For illustration. plus histories will be overstated and liability histories will be understated. The aim of puting tolerable misstatement is to supply sensible confidence that the fiscal statements are reasonably presented in all material respects at the lowest cost. So. hearers may plan a higher tolerable misstatement to minimise cost for the less grounds that will be needed. Conversely. the lower the tolerable misstatement the more grounds that will be needed.
We can non anticipate every history that will be misstated by an sum equal to its tolerable misstatement. In the fact. it is more likely that most histories will be misstated by an sum greater so its tolerable misstatement while others may be misstated by an sum less than its tolerable misstatement. Planing for an audit helps the hearer fast and efficaciously execute the audit before get downing an audit. Hearers are required to plan an audit plan because hearers must see the hazard of material misstatement. Therefore. Hearers should hold test balance sums to set up materiality thresholds for the current twelvemonth audit.