Materiality level Dec’10. Q3.

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    gabriel
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    Hello Sir,

    Kindly help figure this out, the examiner claimed an amount of $20m in compensation was not material to total assets of $4.1m ($4.1m was not up to $20m to start with). Please tell me, is there something i should know, it looks to me she confused figures for word and vice versa.

    Kindly guide me.


    Avatar of MikeLittle
    MikeLittle
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    Are you really sure the figure of $20 was stated in millions? Or alternatively, $4.1 was not billions?
    It seems to me more likely ( sorry to say this ) that you have read the figures wrongly.

    If however you are correct, then it would seem that Lisa ( or the printer ) has got the figures “wrong” or “confused” or “the wrong way round”

    But please check again that you have read the piece correctly – Lisa is a very careful person and her mistakes are extremely rare events


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    gabriel
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    Thank you for your time:

    Below is an exract from the December 2010 Question and the Answer:

    3 Clooney Co is one of the world’s leading leisure travel providers, operating under several brand names to sell package holidays. The company catered for more than 10 million customers in the last 12 months. Draft fi gures for the year ended 30 September 2010 show revenue of $3,200 million, profi t before tax of $150 million, and total assets of $4,100 million. Clooney Co’s executives earn a bonus based on the profi t before tax of the company.

    You are the manager responsible for the audit of Clooney Co. The fi nal audit is nearing completion, and the following points have been noted by the audit senior for your attention:

    In July 2010, thousands of holiday-makers were left stranded abroad after the company operating the main airline chartered by Clooney Co went into liquidation. The holiday-makers were forced to wait an average of two weeks before they could be returned home using an alternative airline. They have formed a group which is claiming compensation for the time they were forced to spend abroad, with the total claim amounting to $20 million. The items which the group is claiming compensation for include accommodation and subsistence costs, lost income and distress caused by the
    situation.

    The claim has not been recognised or disclosed in the draft fi nancial statements, as management argues that the full amount payable will be covered by Clooney Co’s insurance.

    LISA’s ANSWER:

    3 (a) Compensation claim
    Matters to consider
    The claim for compensation is material to profi t as it represents 13·3% of profi t before tax (20/150 x 100%). It is not material to the statement of fi nancial position as it represents only 0·49% of total assets (20/4,100 x 100%).

    Management may want to ignore the provision, as its recognition would reduce profi t before tax by a material amount, therefore reducing their bonus payment. This issue is also inherently risky as it is based on reaching a judgement about the probability of the amount becoming payable


    Avatar of MikeLittle
    MikeLittle
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    So, as I suggested, you appear to have misread the figures or misinterpreted Lisa’s answer.

    This is not 20,000,000 compared with 4,100,000!

    It’s 20,000,000 compared with 4,100,000,000 for the assets.

    However, it is material in the context of the profits figure ( 20,000,000 compared with 150,000,000 ) = 13%

    You need to be VERY careful when looking at amounts with lots of zeros behind them!


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    gabriel
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    Thank you.

    Should it be express as $4.1m or $4.1bn. Lisa said $ 4.1m.
    Sincerely, I got your point and it’s quite lucid.

    I appreciate.


    Avatar of MikeLittle
    MikeLittle
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    Are you REALLY sure that Lisa said 4.1 million? Your own post quoting Lisa’s question says “….profi t before tax of $150 million, and total assets of $4,100 million….!


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    gabriel
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    Thank you Sir.

    That’s what it is, i simply copy past the Question and Answer.
    Kindly look the question up please. If it turns out that she exepressed the figures in millions, would you say she’s right or wrong?

    I appreciate your time.


    Avatar of MikeLittle
    MikeLittle
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    If the figure were in fact 4,100,000, then clearly she’s wrong. But that is most improbable. It is far more likely that this is a printing error or a proof-reading error or a transcription error or just an error.

    Trust in Lisa – she rarely makes mistakes


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    gabriel
    Participant
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    Thank you very much, i truly appreciate your time.
    Please, at your liesure time, kindly take a look at the question.

    God bless!


    Avatar of MikeLittle
    MikeLittle
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    Thanks Gabriel, I shall. However, my leisure time is not likely to start until after you have completed the exam! Seriously!

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