Regarding materiality thresholds and how to determine your audit opinion

[Jamesaccountant]

Regarding materiality, the textbook says that there are three materiality thresholds we use in audit. The first is "Materiality threshold for the FS as a whole", the second is "Materiality threshold for each account", and the last is "Tolerable misstatement (or CT)."


As a general flow, perform a substantive test, aggregate the misstatements that are above CT by account, and if the total misstatements for the certain account exceed the materiality threshold set for the account, that means the account has material misstatements, which can result in a qualified opinion.

Lastly, if you aggregate the misstatements that are above CT for the entire FS, not for each account, and the total amount exceeds Materiality threshold for the FS, it means the FS has material misstatements, which results in an adverse opinion.


Am I understanding correctly? Would you let me know if you spot any piece to be wrong above? Thank you very much in advance

 

[Dave In Capital]

Not that what you're describing is incorrect. It's just that it's important to remember that an adverse opinion due to materiality threshold isn't always expressed in quantitative terms. For example, if the audit discovers items of concern that are quantitatively immaterial, but based on their substance taken in aggregate could pose a risk of pervasive misstatements, then that's certainly justification for a qualified opinion. Let's say you discover employee collusion, but it only amounts to an immaterial dollar amount. And, upon further review you discovered that the theft occurred due to pervasive lapses in internal control. You as the independent auditor could be held liable to shareholders, lenders, and other stakeholders if that is not expressed in the opinion as an exception.