Using Materiality Thresholds in the Evaluation of Audit Evidence 

Generally, if projected errors are below the materiality threshold it can reasonably be concluded that the financial statements are free of material misstatement. However, regulators have made it clear that relying strictly on the materiality threshold determined using a quantitative approach (described above) to make materiality judgments is not appropriate (e.g. SEC SAB No. 99). As such, qualitative factors should also be considered when evaluating the materiality of misstatements. 

The following factors should be considered: 

Does an amount lower than the quantitative threshold for materiality: 

 impact management’s ability to obtain bonuses or other compensation incentives? 

 change an earnings loss to positive earnings? 

 impact the ability of the company to meet or beat analyst earnings targets? 

 imapact the ability of the company to maintain earnings growth?  

impact the ability of the company to maintain debt covenant ratios or regulatory compliance? 

 involve the concealment of an unlawful transaction?

 If any of these, or other similar, factors apply an item that falls below the quantitative materiality threshold (determined above) may be considered material.

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