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Dear Tutor
could you please review if my below statement is correct
we need to use group materiality level to decide whether the individual component is significant to the group, i.e. 0.5% of group revenue, 1% of group total assets
Once we decided the component is significant, component auditors/group auditors need to audit component using component materiality, i.e. % of the component’s revenue, or total assets, or PBT
many thanks
or maybe I am wrong, the lecture notes mentioned 15% of the choosen benchmark, what the benchmark could be to decide the “significance”? 15% of group revenue or total of group assets? or could be anything decided by management or group auditor?
Many thanks
Most widely used benchmarks are same as introduced in AA – see page 56 of AAA notes – revenue/total assets and PBT. It might be revenue for a services-based company (for example) that doesn’t have inventory, plant and machinery, etc.
As is stated on page 101 of the notes, ISA 600 suggests that a component (e.g. a subsidiary) may be considered significant if it exceeds 15% of the benchmark. So it materiality for the group is $10m based on total assets, any components with total assets >$1.5m per their draft financial statements are likely to be considered significant – this means that additional procedures should be applied to these as compared to insignificant components (for which analytical procedures may suffice) – see pages 100-101 of the notes.
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