Auditing and Ethics: Determining Materiality for Cleanaway Waste Management Company

Running head: AUDITING AND ETHICS 1
Auditing and Ethics
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AUDITING AND ETHICS 2
Introduction
The primary purpose of this paper is to examine the 2017 annual report for
Cleanaway Waste Management Company (CWY) to determine the level of materiality that
should be used for the audit of the company’s financial statements for the fiscal year ending
2017. In addition to this, this report also gives a preliminary analytical review on the
information provided by the company. It also seeks to address key balance sheet and profit
and loss ratios over the period 2014 to 2017. Furthermore, the report reviews the cash flow
statement of the company and discusses the primary cash receipts and cash payments of the
company during the year ending 2017.
Section 1: The Level of Materiality to Be Used For the Audit
a. Nature of Materiality
As per the provisions of the International Standards on Auditing (ISA) 320,
materiality refers to misstatements or omissions of key financial items which are considered
to have significant effects on the economic decisions made by various financial statements
users of an entity. The nature and magnitude of materiality is however, highly influenced by
the size of the reporting entity or firm, as well as the nature and size of the financial item
being reported. In Cleanaway Waste Management Company, the level of materiality
determined is to be used in the audit of its financial statements for the year ending 2017
(Aicpa, 2017).
b. What Materiality Represents In Terms of the Audit of a Set of Financial
Statements

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In the audit of financial statements, materiality is used to represent significant
misstatements or errors in the reported amounts. Misstatements or errors in financial
statements are amounts which have not been recorded or corrected. In normal financial
statement audits, auditors must seek to identify and report the dollar amount of such errors
and misstatements on a predetermined schedule that normally lists two major categories of
errors and misstatements in financial statements (Liu, 2015). For instance, this includes
amounts recorded and reported in financial statements which have not been recorded
correctly. They are transactions which were generally not recorded correctly since they were
posted in incorrect amounts or in wrong accounts. In addition to this, the schedule also shows
amounts which were supposed to have been recorded in the financial statements but were
eliminated (Moeller, 2016).
In regard to these errors and misstatements in the financial statements of Cleanaway
Waste Management Company, it is essential for the auditor to calculate and determine the
exact dollar amounts of such misstatements or errors as contained in the financial statement
of the company. Regarding errors which have been based on an estimated adjustment, the
auditor must consider them to have resulted from deficiencies or weaknesses in the internal
controls of Cleanaway Waste Management Company. Therefore, the auditor must consider
reviewing each and every item of the company’s financial statement against an acceptable
level of materiality which is determined during audit planning, with a view to determining
and ascertaining whether he should make necessary adjustments to the financial statements
or not (VALLABHANENI, 2018).
c. Different Bases and Considerations Employed in Arriving at Materiality

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In determination of the levels of materiality for Cleanaway Waste Management
Company, the auditor must take into account various factors and bases, which are very key.
For instance, the level of materiality adopted must be in relation to various uses and purposes
for which the audit of the company’s financial statements is intended. Therefore, it is
necessary for the auditor to understand the financial information which is considered very
valuable and useful to decision makers and users of the financial information reported in
such reports. For instance, regarding issues that relate to solvency or regulation, the level of
materiality is highly dependent on the industry or firm benchmarks in solvency ratios. In
addition to this, for purposes of appraisal, the level of materiality is specifically influenced
by the net income or net worth of the company, as well as its earnings per share for the given
operating period. Furthermore, for general purposes in relation to the company’s financial
statements, the level of materiality depends highly on the net surplus as well as the net
capital or net income of the company (Fiedler, & Fiedler, 2010).
Besides, the level of materiality is influenced by other features or characteristics of
the company, including its size and access to capital, as well as the stage of organizational
life cycle. The financial strength of a company or firm is also considered a critical factor in
determining its level of materiality that should be used in the audit of its financial statements.
It has generally been postulated that as an entity approaches a certain materiality threshold,
the standard of materiality for work which relates to that threshold becomes more rigorous
(Wells, 2014).
d. The Rationale behind Your Choice of a Certain Level of Materiality