Certified Government Auditing Professional (CGAP) Practice Exam

What key concept helps auditors decide what constitutes a misstatement in a financial audit?

1. Management Assertions

2. Materiality

3. Sampling

4. COSO framework

The correct answer is: Materiality

Materiality is a fundamental concept in auditing that guides auditors in determining what constitutes a misstatement in financial statements. It refers to the significance of an amount, transaction, or discrepancy that could influence the economic decisions of users relying on those financial statements. Auditors assess materiality to establish thresholds for identifying misstatements, helping them to focus on issues that could affect the overall interpretation of the financial statements. For instance, an immaterial misstatement may not warrant an adjustment or even a report in an audit, as it is unlikely to affect stakeholders' decisions. Conversely, material misstatements could lead to distorted financial reporting and necessitate corrections to ensure compliance with applicable accounting standards. By applying the concept of materiality, auditors prioritize their work and ensure that their findings are relevant to the needs of the users of the financial statements. Management assertions relate to the claims made by management about various aspects of the financial statements, while sampling is a technique used to draw conclusions from a subset of data. The COSO framework refers to internal controls and risk management processes. While these concepts are important within the context of auditing, they do not directly address the criteria used to determine the significance of misstatements as materiality does.