Materiality

Hi Tutor,

I am confused by the answer given in this question below:

Q: BPP study text chapter 19

The calculations of the cost of direct labor incurred on assets in the course of construction by the company’s employees have been accidentally destroyed for the early part of the year. The direct labour cost involved is $10,000.

Profit before tax = $100,000
Non current asset additions=$133,000
Assets constructed by company = $34,000
Non current asset at net book value = $666,667

State whether you feel that a modified audit opinion would be necessary for each of the two circumstances outlined above, giving reasons in each case.

Answer:
The loss of records supporting one of the asset figures in the statement of financial position would cause a limitation in scope of the auditors’ work because the auditor would be unable to obtain sufficient appropriate audit evidence. The $10,000 represents 29.4% of the expenditure incurred during the year on assets in course of construction but only 6% of the total additions to non current assets during the year and 1.5% of the year end net book value for non current assets. The total amount of $10,000 represents 10% of pre tax profit but, the real consideration by the auditor should be the materiality of any over or understatement of assets resulting from error in arriving at the $10,000 rather than the total figure itself.
Provided there are no suspicious circumstances surrounding the loss of these records and the total figure for additions to assets in the course of construction seems reasonable in the light of other audit evidence obtained, then it is unlikely that this matter would be seen as sufficiently material to merit any modification of the audit opinion. If other records have been lost as well then it may be necessary for the auditor to comment on the directors’ failure to maintain proper books and records.

Question 1:
Why is the real consideration by the auditor on only the materiality of overstatement/ understatement of assets and not on the materiality of the total financial statements figure?

I’m thinking this because if the auditor is not able to gather sufficient evidence to verify that these costs have been incurred or have fulfilled the capitalization criteria as per IAS16, then the profit figure in the FS would be overstated as well, right? So, shouldn’t this matter be material as it represents 10% of the profit before tax figure?

Question 2:
Also, if the matter were to be considered as material to the financial statements, would the effects be pervasive since both assets and profits would be affected by the lack of evidence?

Hoping you could help me on this, thank you!