Planning materiality and SAS No. 47

When determining materiality, auditors should focus on the perceived needs of financial statement users. According to Statement on Auditing Standards 47, "Audit Risk and Materiality in Conducting an Audit," materiality should be considered during the planning stage of an audit in order to determine the amount of evidence needed to evaluate the financial statements at the end of the audit. Planning materiality should be used to evaluate both likely errors and possible further errors, and the appropriate client officers should be informed of known and likely errors found during an audit. To determine how auditors make planning materiality judgments, 97 auditors made preliminary materiality judgments for 2 case studies. The level of agreement increased as the degree of auditor experience increased, and the most commonly used basis for planning materiality judgments was pretax operating income. A workpaper approach is presented for aggregating errors and evaluating financial statement presentation.