Auditing and Assurance: Planning Materiality and Analytical Procedure

Running head: AUDITING AND ASSURANCE
Auditing and assurance
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1AUDITING AND ASSURANCE
Table of Contents
Case study – Cloud 9..................................................................................................................2
Part 1 – Planning Materiality.................................................................................................2
Part 2 – Analytical procedure.................................................................................................4
Research questions:....................................................................................................................7
Introduction:...............................................................................................................................7
Discussion:.................................................................................................................................7
Executive’s payment method:....................................................................................................7
Conclusion:..............................................................................................................................10
References list:.........................................................................................................................11

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Case study – Cloud 9
Part 1 – Planning Materiality
Planning materiality is the maximum amount of statements that could be misstated by
way of any unknown fraud and errors as believed by auditors that would not have any impact
on the financial or investment decisions made by the users of financial statements. It is
required to quantify the materiality levels as per the clarified accounting standards and such
estimates helps in guiding the decision making of auditors.
For the computation of planning materiality or the tolerable level of misstatements at
any given level of financial statements, a general range of percentage is used based on the
moderate level of risk. Planning materiality is computed at the higher level if the level of risk
is extremely low. On other hand, the planning materiality level is calculated at lower level
when the level of financial statement risk is high. It is the professional judgement of auditors
that determines the illustrations of the percentage factors that results from the assessed level
of financial statement risk. The lower limit relating to any significant items in the financial
statements is determined by the performance materiality that depends upon the low or high
risk respectively (Amiram et al. 2017). Therefore, it can be concluded that planning
materiality plays a very significant role in their audit decision making and accordingly
representing a true and fair view of the financial statements.
The given case study is about the company Cloud 9 Pty Limited that is a retailer and
manufacturer of the customized basket ball shoes. Company operates in number of countries
which is indicative of the facts that it has large scale business. An auditor of Cloud 9 is
interested in knowing the planning materiality for determining the estimated amount of
misstatements in the financial statements so that they can develop the audit strategy

3AUDITING AND ASSURANCE
(Audsabumrungrat et al. 2015). For planning the audit, auditor relies on the projected yearend
balance that is of approximate value for computing the planning materiality. The several
bases that can be used by the auditors to compute the materiality of the Cloud 9 includes
turnover which is at 0.5%, profit before tax at 5%, total assets at 0.5%, gross profit at 2% and
equity at 1%. For calculating the materiality base, auditor takes into account profit before tax.
However, if the entity reports loss in any financial year, profit before tax cannot be used as
the basis of calculating planning materiality.
Table 1: