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- September 10, 2017 at 7:36 pm #407160
Hi Opentuition,
I am hoping you can clear up a confusion I have with regards to performance materiality and combining of G/L codes/balances:
I understand that we have to set PM at a value less than overall FS materiality, to allow for detected uncorrected misstatements. As PM is essentially the “sensitivity” to which we have worked, we should assume that a balance audited to PM could be misstated by a value of up to PM. Therefore, any detected, uncorrected, misstatements we find are added to PM and if this resulting total is below FS materiality we can conclude the balance is not materially misstated.
I understand this in theory, but in practice (I work in audit) we have multiple G/L codes combined to form one balance in the statutory accounts. And I assume when we talk about the financial statements being materially misstated we mean based on the most granular grouping shown in the stats – i.e. note level detail (trade debtors, prepayments etc.). However, as we often test balances on a G/L level detail, if we applied the PM logic in the first paragraph to two separate G/L code balances, both of which “rolled-up” into “Trade debtors” in the stats for example – then if we assume that each of these two balances could be misstated by up to PM (as this was the performance materiality/sensitivity applied when testing these balances), then combined could this not exceed materiality (let’s assume we detected no misstatements in either of the balances tested)? Appreciate the above is a ‘theoretical’ way of viewing it, but I understand PM this way.
I suppose another example is if we “scope out” of testing two G/L balances from testing as they are both below PM and therefore do not present a threat of material misstatement, if these balances are in the same stats grouping (e.g. trade receivables) could there not be a material misstatement in total?
Hope this makes sense, difficult one to describe….
Thanks,
Josh.
September 11, 2017 at 7:01 am #407193This free forum is for queries relevant to the F8 exam. Your question goes well beyond that.
Sorry, we sre not a free consultancy srrvice for auditors.
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