The Level of Materiality
For the analytical procedures, we use 5% rule of thumb to compute overall materiality and to indicate the level of materiality of the difference between reported revenue and our expected revenue. In this case, we use the 5% of pre-tax net income to establish a level of materiality. We compute the materiality by multiplying 5% with the pre-tax net income of $731,845, in which the result is $36,592.25. Therefore, the difference is ...view middle of the document...
The difference falls within our reasonable range. Therefore, we draw a conclusion that the reported revenues of 2011 are reasonable and fairly stated.
However, the analytical procedures based on the aggregated approach shows the different result, in which the difference between reported revenue and our expected revenue is $356,970. It is greater than overall materiality of $36,592. The difference falls outside our reasonable range and is considered material.
Therefore, the auditor should develop more precise expectations. This is because the use of more detailed data in the disaggregated approach provides more precise expectation and effectiveness than using the aggregated data in the second approach. The disaggregated data provide auditors a greater chance to detect material misstatements. There are additional reasons that can explain why the reported ticket revenues were outside our reasonable range, which could be a misstatement of revenues, auditor error, low reliable of data, an inadequate amount of inputs, improperly recorded transactions, and a management fraud to report false financial statement.