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by H2R CPA Team
When accountants conduct an audit or review, they can’t test every transaction. Instead, they set a “materiality” threshold. This benchmark is used to obtain reasonable assurance in an audit — or limited assurance in a review — of detecting misstatements that could be large enough, individually or in the aggregate, to be material to the financial statements.
What is materiality?
Unfortunately, there’s no specific definition of materiality under U.S. Generally Accepted Accounting Principles (GAAP). But the Conceptual Framework for Financial Reporting under International Financial Reporting Standards (IFRS) says:
Information is material if omitting it or misstating it could influence decisions that users make on the basis of financial information about a specific reporting entity. In other words, materiality is an entity-specific aspect of relevance based on the nature or magnitude, or both, of the items to which the information relates in the context of an individual entity’s financial report.
Several definitions of materiality exist. But the universal premise is that a financial misstatement is material if it could influence the decisions of financial statement users.
How do auditors determine materiality?
To establish a level of materiality, auditors rely on rules of thumb and professional judgment. They also consider the amount and type of misstatement.
The materiality threshold is typically stated as a general percentage of a specific financial statement line item. For example, let’s suppose Joe Auditor sets a materiality threshold of 1% of revenue for ABC Company. For 2017, the company reports annual revenue of $190 million, so its materiality threshold is $1.9 million.
During fieldwork, Joe unearths a clerical error that caused ABC to understate revenue by $1 million. Is this error material? Although a $1 million error may seem significant, it’s less than 1% of the company’s annual revenue. So, it’s immaterial to ABC’s overall financial performance.
On the other hand, if the company had overstated its revenue by $1 million due to a fraud scheme involving a senior executive, Joe may deem the misstatement as material because it involved a member of the senior leadership team and potential criminal activity.
Regardless of whether a misstatement of revenue is considered material, it may trigger a material misstatement in accounts receivable. In other words, the balances recorded as due from customers may be materially different from the actual amounts due.
It’s all relative
As these examples demonstrate, materiality is a relative concept. In practice, auditors must evaluate a material misstatement on a standalone basis and within context of a company’s financial statements overall. What constitutes a material misstatement for one company may not reach the materiality threshold for another. Materiality is a matter of professional judgment and your audit team’s experience.
Contact H2R CPA at 412-391-2920 or email@example.com to learn more about how we can assist you with your Assurance needs. Our team would be pleased to provide a complimentary consultation.
by H2R CPA Team
The “sandwich generation” accounts for a large segment of the population. These are people who find themselves caring for both their children and their parents at the same time. In some cases, this includes providing parents with financial support. As a result, estate planning — which traditionally focuses on providing for one’s children — has expanded in many cases to include aging parents as well.
Including your parents as beneficiaries of your estate plan raises a number of complex issues. Here are five tips to consider:
1. Plan for long-term care (LTC). The annual cost of LTC can reach well into six figures. These expenses aren’t covered by traditional health insurance policies or Medicare. To prevent LTC expenses from devouring your parents’ resources, work with them to develop a plan for funding their health care needs through LTC insurance or other investments.
2. Make gifts. One of the simplest ways to help your parents financially is to make cash gifts to them. If gift and estate taxes are a concern, you can take advantage of the annual gift tax exclusion, which allows you to give each parent up to $15,000 per year without triggering taxes.
3. Pay medical expenses. You can pay an unlimited amount of medical expenses on your parents’ behalf, without tax consequences, so long as you make the payments directly to medical providers.
4. Set up trusts. There are many trust-based strategies you can use to financially assist your parents. For example, in the event you predecease your parents, your estate plan might establish a trust for their benefit, with any remaining assets passing to your children when your parents die.
5. Buy your parents’ home. If your parents have built up significant equity in their home, consider buying it and leasing it back to them. This arrangement allows your parents to tap their home equity without moving out while providing you with valuable tax deductions for mortgage interest, depreciation, maintenance and other expenses. To avoid negative tax consequences, be sure to pay a fair price for the home (supported by a qualified appraisal) and charge your parents fair-market rent.
As you review these and other options for providing financial assistance to your aging parents, try not to overdo it. If you give your parents too much, these assets could end up back in your estate and potentially exposed to gift or estate taxes. Also, keep in mind that some gifts could disqualify your parents from certain federal or state government benefits.
Contact H2R CPA at 412-391-2920 or firstname.lastname@example.org to learn more about how we can assist you with your Estate Planning needs. Our team would be pleased to provide a complimentary consultation.
by Joseph M. Delisi, CPA, Principal
Despite the continuing decline in overall paper check usage, check fraud continues to pose a risk for many organizations. Since checks are passed person-to-person on their way to payment, they can easily be stolen, duplicated, altered or cashed illegally.
Are you concerned about check fraud losses at your business? Positive Pay may be the solution for you. It is essentially an insurance policy against unauthorized disbursements from your bank account. It is a service offered by banks for a fee, although some banks are now offering this service at no cost.
Here’s how it works: Positive Pay requires a company to transmit to the bank a file of checks issued each time checks are written. The file submitted to the bank contains the check number, date, amount, and bank account number. When those checks are presented to the bank for payment, they are compared electronically against the list of transmitted checks.
When a check presented for payment does not match the information on the file transmitted to the bank, it becomes an exception item. Before the bank processes the check for payment, it sends an image of the exception item to the client. The client then reviews the image, and instructs the bank to either process the check for payment, or return the check as unpaid. This allows the company to identify fraudulent checks before they are paid by the bank.
Positive Pay is an effective way to institute check fraud protection, stop bad payments, and reduce liability when dealing with a large volume of checks.
H2R CPA is pleased to assist clients in finding ways to protect themselves against fraud. Contact our team at 412-391-2920 or email@example.com for more information. We would be pleased to provide a complimentary consultation.
For additional insight and expertise, please visit the following blogs from some of our CPAAI member firms:
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