What is the clearly trivial threshold?
Audit teams should establish a “clearly trivial threshold”, which is usually calculated as a percentage of overall materiality (e.g. 5% of overall materiality). Audit teams need to define this threshold because there may be errors that are below overall materiality, that when aggregated with other misstatements, may result in a material misstatement.
How to calculate the clearly trivial threshold?
If overall materiality is $10,000, and the audit firm establishes the “clearly trivial threshold” by applying 5% (each firm will have their own methodology), then the clearly trivial threshold would be $500.
How to interpret the clearly trivial threshold?
Now that we know the clearly trivial threshold is $500, each member of the audit team should understand that if there is an error that is less than $10,000 but greater than $500, it needs to be recorded to a list (typically tracked in the audit software). While the difference or error won’t result in a material misstatement on an individual basis, when combined or aggregated with other errors, there could be a material misstatement.
How to aggregate differences to assess if a material misstatement exists?
At the end of the audit, the audit team should combine all of the errors or differences that are less than $10,000 but greater than $500 by the financial statement line item they impact. For example, if the audit team identified the 3 errors that all related to revenue (see below), then the aggregated impact is $10,750, which is above overall materiality of $10,000. Now there is a material misstatement to revenue!
How can I keep track of all these small differences?
Make life easier by having everyone on the team keep track of these differences as they go. Have a centralized workpaper in the audit file where the team tracks them. Otherwise, you’ll have to go through all of the workpapers at the end of the audit to make sure items below materiality don’t aggregate to a material misstatement!
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