Materiality in audit planning is used to guide planning and evaluation of misstatements and is typically set using quantitative bases such as percentages of net income or assets.

• A. It is a fixed threshold applied to all audits without modification.
• B. It applies to misstatements only after the audit is completed.
• C. It guides planning and evaluation of misstatements; set using quantitative bases (e.g., a percentage of net income or assets) and augmented for high-risk or public-interest areas.
• D. It only applies to disclosures and not to the financial statements.

Answer: (D)

Materiality in audit planning is a threshold used to guide both how you plan procedures and how you evaluate misstatements. It's usually set with quantitative bases like a percentage of net income or assets, providing a baseline for what would be material. That baseline isn’t fixed or universal; it’s adjusted upward for high‑risk areas or items with public interest where misstatements could have a larger impact. This approach ensures the audit focuses on issues that could influence users’ decisions while also allowing more scrutiny where risk is greater. The idea that materiality is a fixed universal threshold is not correct, and treating it as something used only after the audit is completed is incorrect because materiality informs planning and the evaluation of misstatements during the engagement. It also isn’t limited to disclosures, since disclosures are part of the financial statements and materiality applies to the statements as a whole.