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The BPP F8 text says that auditors should obtain audit evidences when noncompliance to regulations will have a “direct effect” on the FS and….
…. carry out audit procedures when noncompliance will have a “material effect” on the FS.
Questions is; how do you distinguish between matters that will have a direct or material effect?
How can a noncompliance have a material effect and not have a direct effect on the FS?
And is it possible for a noncompliance to have a direct effect and not have a material effect on the FS? If Yes, how?
Its a very fine difference.
Direct effect would be, for example, not calculating your tax in line with legislation. The tax figure is wrong.
Material effect (but not direct) could be the company leaving itself open for fines and damages. Perhaps a provision should be set up.
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