So the quantitative benchmarks that you often will see include the following. Income before taxes, that's probably the most popular. Overall total assets, when you use total assets, it's going to be a smaller percentage. Total equity, is sometimes used. Now, why would you use total assets or total equity instead of net income before taxes? Maybe you are thinking about that momentary, that's why I pause. The real reason is that, it's very popular for firms that are barely earning any income, or in fact have a net loss situation. So, startup firms, firms that have net losses. If you start using a percentage of a sort of artificially small number because a firm is just now becoming profitable, it's better to use a balance sheet base, total assets, or total equity, as the base for materiality. So, when they look at the largest 8 firms, 7 firms use a percentage of overall materiality for determining tolerable misstatement that fits in the 50 to 75% range in one firm is a little bit more lax, using 70 to 90%. I say lax, don't get this backwards, when you say, my planning materiality percentage that I'm applying to the account balance, which is the tolerable statement, by the way, it's also sometimes called performance materiality. So, overall materiality. A synonym for that is planning materiality. You may see in in different publications. Tolerable misstatement, a synonym for that, is performance materiality. When you have a larger percentage... you're taking your base times a larger percentage, and saying that that is where materiality lies for the account, you're being more lax. Because you're saying it's going to take a bigger misstatement as a percentage of my base before I think users are going to care about that. Or if I'm using it for planning the audit, I'm not going to design my audit to find misstatements that are smaller than this amount. Okay? So, what you see here, 7 firms are a little bit more conservative, and pretty similar, 50 to 75% of overall materiality, planning materiality, it's uses tolerable misstatement, performance materiality. One firm more lax. What about the cutoff for clearly trivial misstatements? Well, here, and this one's not as important, but it is interesting because it talks about what misstatements auditor's ignored. Sometimes people think that auditors are the ones who spend hours upon hours balancing their checkbook, and not giving up on a reconciliation even when things don't balance to the nearest $0.10 or even a penny, that is simply not true. Auditors are the ones who say, if it gets close enough, that is materially, no difference, then we're done. Okay. So, in this study, again you see a clustering of 7 firms saying that, a clearly trivial misstatement is 3 to 5% of overall materiality. Again, one firm is a bit more lax and saying 5 to 8%. Now all of the firms provide the professionals with a list of qualitative factors that need to be considered when thinking about whether a misstatement that has been found is material or not. The other way that these qualitative factors come into play, for example, a qualitative factor could even be, is this firm about to be purchased by another firm? Another qualitative factor might be, for some reason, you have some doubts about client management's integrity, not enough to make you walk away from the audit, but you are a little bit worried about the tone at the top. That itself is a qualitative factor that would make you have a lower percentage in your tolerable misstatement as compared to overall materiality. If you thought, on the other hand that, this is a very well-run organization, they are not going to sell anything soon, and I'm going to spin off part of operations, management has the highest integrity, very high tone at the top, and they're not in danger of missing any analyst's forecast this type of thing, then your tolerable misstatements will tend to be at the higher end. But the firms provide checklists for their audit professionals just to make sure they consider a variety of qualitative factors. One more example would be a trend and profitability. So if you have the same quantitative level of misstatement, but if you were to adjust it, it would enable an upward trend and profitability to stay intact. Maybe just change the slope a little bit. That's one thing. But if that same misstatement makes a trend turn and go another way, then suddenly that's more likely to be material in the eyes of financial statement users. So the auditor needs to pay attention. The group audits, it's a little bit beyond the scope, but a group audit's when you have multiple audit firms, pay attention to the client and we can defer that topic mostly. I can share, I can provide some extra materials for the class on that one. There are some differences however, in the ways that firms consider the possibility of undetected misstatements when evaluating uncorrected detected misstatements. That's maybe a bunch of academic jargon for saying the following. Firms differ when they approach management, and say, you know I think there are still some misstatements out there, that we didn't find in our sampling, but we're just not comfortable signing off on the financial statements unless you provide a larger allowance for those misstatements in your estimates. So there would be a negotiation process at that point.
