- 20 Marks
AA – Nov 2018 – L2 – Q3 – Planning an Audit
Explains materiality in accordance with ISA 320 and addresses steps for materiality and receivable circularization in an audit.
Question
Holy Family Limited is a trading company that deals in furniture. The company is a major distributor to Happy Couples Limited that manufactures the furniture. The turnover of the company as at December 31, 2017, was ₦120,000,000. Also, in the statement of financial position is a figure of ₦2,500,000 that represents trade receivables. The auditor informs the Managing Director of the need to circularize the debtors. The Managing Director feels indifferent to circularization, saying that the figure of ₦2,500,000 is not material with a turnover of ₦120,000,000.
Required:
a. As an auditor, explain to the Managing Director the concept of materiality in accordance with ISA 320.
(5 Marks)
b. State the steps you are expected to take as regards materiality when planning and performing an audit.
(5 Marks)
c. Explain to him why you should confirm receivable balances through circularization.
(3 Marks)
d. If you decide to circularize only a sample of receivables, list the types of accounts that should not be overlooked in selecting the sample.
(7 Marks)
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