Different users for different purposes to use financial information. Not all parts of the financial statements are equally relevant to all users. For instance, stockholders are more concerned with profit growth and revenue than creditors. Materiality is a relative rather than an absolute concept. Based on different operation environment, the materiality threshold will vary to influence users of the financial statement. For example, the magnitude of a misstatement that will influence users of the financial statement will change based on how the entity is performing in the industry. Most misstatements affect both a balance sheet an income statement account due to the dual entry method. So, auditors must design a audit plan to detect the smallest misstatement that will influence users of the financial statement.
A risk of management fraud will affect directly the accounting amount, such as net income. For example, asset accounts will be overstated and liability accounts will be understated. The objective of setting tolerable misstatement is to provide reasonable assurance that the financial statements are fairly presented in all material respects at the lowest cost. So, auditors may design a higher tolerable misstatement to minimize cost for the less evidence that will be needed. Conversely, the lower the tolerable misstatement the more evidence that will be needed.
We cannot expect every account that will be misstated by an amount equal to its tolerable misstatement. In the fact, it is more likely that most accounts will be misstated by an amount greater then its tolerable misstatement while others may be misstated by an amount less than its tolerable misstatement. Planning for an audit helps the auditor fast and effectively perform the audit before starting an audit. Auditors are required to design an audit program because auditors must consider the risk of material misstatement. Thus, Auditors should have trial balance amounts to establish materiality thresholds for the current year audit.