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in part (b) question name Boston, question provided us total revenue, profit before tax and assets to calculate materiality percentage.
However, my question is why the answer did not calculate the revenue percentage for the part (i) when answer calculated the percentage amount for profit.
Both revenue and profit are shown in profit or loss account but i do not understand why only profit portion is shown for the materiality calculation.
i know that we only calculate materaility calculation for only those that are relevant but why revenue portion is excluded ? (For eg impairment since it’s an item that appears in profit or loss)
I don’t have the question or answer to hand but if, for example, you are assessing materiality of potential impairment loss the relevant calculations are PBT, total assets (and/or the % of the category of asset affected).
The only thing that affects revenue (a single line) in a statement of profit or loss is revenue(!) – so if you were assessing the materiality of incorrectly recognised revenue, revenue recognised in the wrong period (cut-off), discounted prices, etc – the relevant parameters for the calculation of materiality would be revenue and PBT (i.e. both “top” and “bottom” lines of SoPL) and total assets if the “other side” of the misstatement should be an asset or liability (e.g. trade receivable or contract asset or liability). If the other side of the entry is in SoPL there would be no effect on PBT – to that would not be relevant (nor total assets).
Is that clearer?
hi Kim smith, i really appreciate for the prompt response
1. in the last sentence, you have mentioned that
“If the other side of the entry is in SoPL there would be no effect on PBT – to that would not be relevant (nor total assets)”if other side of the entry is in SoPL, shouldn’t we suppose to calculate PBT ( and not asset ) ??
since PBT will be affected by the “other side of the entry in SoPL” ?2. so what you mean is that revenue should only be calculated if a single item (misstatement) affects the revenue eg. discounted sales price and revenue recognized in the wrong period ( not impairment since impairment will only affect the total asset and PBT amount )
is it correct ?
1. Suppose there is potential overstatement of revenue of $100k – if the other side of the misstatement is an item in SoPL (either understatement of another income line – say finance income or overstatement of an expense item) there is no effect on PBT – and no effect on total assets.
2. Yes – it is meaningless to measure the materiality of any item against revenue if it doesn’t affect/would not change the amount of revenue.
1. just to confirm what i have what i have understood, we only consider the “wrong entry” that the question(for now, your example) have made. since there’s potential overstatement of revenue of 100k, i only calculate the revenue materiality percentage amount(not PBT or total assets) and disregard the other side of the misstatement (As there will be understatement of another income line due to overstatement of revenue).
We only consider the category that is AFFECTED and clearly laid out in the question.
Is it correct ?
Yes we only consider what is affected – but see in my INITIAL response – we DO consider the other side if the other side has a bearing on another relevant parameter. E.g if revenue is materially overstated due to a cut-off error and the other side of the entry means that trade receivables are overstated then materiality can be validly assessed against revenue, PBT and total assets.
Hi Kim Smith, May i ask a question ?
in this example you have mentioned
“if revenue is materially overstated due to a cut-off error and the other side of the entry means that trade receivables are overstated then materiality can be validly assessed against revenue, PBT and total assets”let’s assume revenue is materially misstated and therefore in the answer, i have only calculated revenue materiality portion and said that it’s material to profit or loss statement
and when we assume total mark is 1 mark for identification and calculation of materiality, i can only score 0.3 mark ? since we must have calculated all revenue, PBT and total assets ?
or do we get one full mark as long as we calculate at least one relevant materiality amount & explained about it ?
You get a full mark – it’s not prorated just because there is more than one calculation you could have made.
so actually, instead of trying to calculate 2 or 3 materiality percentages, isn’t it better off to calculate just one straightforward materiality percentage and move on to other parts or questions ?
But frankly i do not understand why a question try to calculate multiple percentages in June 2009, Robster Co, part (a) (ii).
In that question, they only mention financial asset but they have calculated all total assets, profit before taxa nd revenue.
It’s really confusing to us how many materiality percentages to calculate
YES! That’s exactly my point – one assessment against a relevant parameter is better than a “scatter-gun” approach to calculating everything possible.
I think that’s an oversight in Robster – the % revenue is irrelevant.
that’s for section B question, how about Section A question ? is it the same where we calculate just one relevant parameter ?
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