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Hello Miss, under the PYQ March 2020 Q1(b)
Why it’s possible the percentage is applied to one benchmark either based on total asset or revenue or profit before tax as some transaction affects either Pnl or SOFP only?which the examiner answer seems suggested that or am I misunderstanding it?
“and it is acceptable to use a benchmark of 1% of total assets as a basis for materiality. However,this would normally be used for a capital-intensive business, not for a company like Daryl Co, which is service based.
A percentage of profit is deemed an appropriate method of calculating materiality in a profit-making business.”Thank you.
For the evaluation of misstatements – the chosen benchmark has to be relevant to the misstatement that’s being assessed.
If a misstatement affects profit – use profit – if it affects total assets – use total assets.Don’t use revenue if it doesn’t affect revenue – see an example here https://opentuition.com/topic/materiality-the-auditors-report
When talking about just one overall materiality for the financial statements as whole, there is a potential problem for a business that offers services through resources that are not recognised on the statement of financial position – e.g. an ACCA tuition provider may not own any premises and its main resource is its tutors. So 1-2% of total assets might be trivial (and so not appropriate) as compared to 5-10% of profit or 0.5-1% of revenue.
So what does the examiner answer try to express for? Possible for one benchmark for whole FS?
3rd sentence of the answer “A percentage is often applied to a chosen benchmark as a starting point in determining materiality for the financial statements as a whole …”
Exhibit 4 says “Material will be …” “Materiality is ….” this must mean materiality for the financial statements as a whole. (If talking about performance materiality it would have to say “performance materiality”.)
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