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While i was reading the bpp study text i had a doubt!!!
In owner managed businesses, if owners are paid a salary and are indifferent to dividends, the key profit figure stands higher in the statement of profit or loss, say at gross profit level. Alternatively in this situation, the auditor should consider a figure that does not appear in the statement of profit or loss: profit before directors’ salaries and benefits. ”
why the auditor should consider figure that does not appear in the statement of profit or loss such as profit before directors salaries and benefits and not a figure after director salaries in basics for materiality reasons?
PS the above paragraph is taken from bpp study text page 164 in relation to problems of materiality?
“the key profit figure stands higher in the statement of profit or loss, say at gross profit level”
I’m not sure of the wisdom of this unless you’re looking at percentages involving gross profit
The point I believe that is being made is that if an owner managed company were similar to a sole-trader or partnership, the owner’s remuneration would be an appropriation of after tax profits
So where comparison is being made with a similar, but unincorporated, business we need to work out someway where we can compare like with like
Sure, we can use gross profit whatever the owner’s liking for dividends / salary
But for net profit, the inclusion of the owner’s salary in place of other owners’ dividends renders comparison inappropriate … unless adjustment is made for the purposes of the calculation
Is that better?
While i was reading the bpp study i had a doubt!!!
In owner managed businesses, if owners are paid a salary and are indifferent to dividends, the key profit figure stands higher in the statement of profit or loss, say at gross profit level. Alternatively in this situation, the auditor should consider a figure that does not appear in the statement of profit or loss: profit before directors’ salaries and benefits. ”
why the auditor should consider figure that does not appear in the statement of profit or loss such as profit before directors salaries and benefits and not a figure after director salaries in basics for materiality reasons?
PS the above paragraph is taken from bpp study text page 164 in relation to problems of materiality?
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