- 15 Marks
AAA – Nov 2022 – L3 – SC – Q7 – Risk Management in Audits
Explain materiality, benchmarks, and factors affecting materiality determination in audits.
Question
The audit plan and scope was presented to the Audit Committee of Deinde Limited for the year ended December 31, 2020. The external auditors of the company stated:
“We would estimate materiality using profit before tax for the full year. We would estimate our preliminary materiality based on expected results for the full year. We will perform a materiality re-assessment at year-end to confirm adequacy or otherwise of our preliminary materiality. We will report to the Audit Committee on all unadjusted misstatements greater than our established threshold unless they are qualitatively immaterial.”
Your uncle, who is a member of the Audit Committee, discussed this matter with you and requested that you explain the issue further.
Required:
a. Explain the concepts of materiality and performance materiality in an audit of financial statements.
(3 Marks)
b. Explain the benchmark for determining materiality. (5 Marks)
c. Discuss the factors that may affect the identification of an appropriate benchmark. (7 Marks)
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