Establishing Materiality - Example 1 Planning materiality Start with pretax income  5% to 10% based on risk level If excessive fluctuation in income year-to-year  use total sales instead of income  use ½% to 1% If sales not stable  use gross margin  use 1% to 2%

If gross margin not stable  use total assets  use.25% to.5%

Tolerable error (performance materiality) Set at 50% to 75% of materiality  if very stable company use 50%  this becomes nominal amount  if error found above this amount, include in audit differences  if below this amount pass on it Evaluation Summarize all errors over nominal amount  then compare to planning materiality

McGraw-Hill/Irwin Larger of Client Total Revenues or Total Assets is … Over But not Over Planning Materiality + Factor X Excess Over $0$30 thousand$ X$0 30 thousand100 thousand1, X30 thousand 100 thousand300 thousand3, X100 thousand 300 thousand1 million8, X300 thousand 1 million3 million18, X1 million 3 million10 million38, X3 million 10 million30 million85, X10 million 30 million100 million178, X30 million 100 million300 million396, X100 million 300 million1 billion826, X300 million 1 billion3 billion1, X1 billion 3 billion10 billion3,830, X3 billion 10 billion30 billion8,550, X10 billion 30 billion100 billion17,800, X30 billion 100 billion300 billion89,600, X100 billion 300 billion...82,600, X300 billion Materiality Table - Example 2