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When we calculate the error according to percentages given in book:
Revenue-0.5-1%
Assets-1-2%
Profit-5-10%Doubts-
1)Do we take lower number of the materiality bracket, say for profit we will pick 5% anything up 5%will be material? Right? or anything between 5-10% will immaterial and anything above 10% will bw material?2)Does it matter that the misstatement is in P&L or in balance sheet while calculating the materiality? If all the 3 conditions satisfy above then only unmodified opinion will be given?
3)In question for example, auditor discovered £5000 mistake in calculation of depreciation expense for the year and director refuse to adjust and the carrying amount of non current assets – 1million, draft profit of the year Is £150,000 and the revenue is £2million
Answer- if we calculate the materiality:Revenue=5000/2000000*100=0.25%(Not material)
Assets-5000/1000000*100=0.5(Not material)
Profit=5000/90000*100=5.55%( material)Will they audit opinion be Qualified ‘except for’ because one out of three does not satisfy the condition.
1. e.g. profit:
< 5% is immaterial
> 10% is material
in-between is the “grey area” – so a matter of judgment whether or not it requires adjustment
2. See the illustrations here https://opentuition.com/topic/materiality-the-auditors-report/
3. After reading the illustrations in 2 you should appreciate that a % of revenue is a meaningless irrelevancy since a misstatement in depreciation does not affect revenue. The audit opinion would most likely be unmodified since $5,000 is only 3.3% of $150k draft profit.Thanks for explanation, but as you said in between the brackets it’s the matter of judgement. How will we decide that whether it require adjustment or not?
If you read any model answer I think you should suppose that anything above the lower threshold is material (whether or not they would be corrected would ultimately be a matter for the audit partner depending on the evaluation of all the misstatements).
1.So in an exam if our calculation gives us an answer between the brackets and above the lower limit like for revenue= above 0.5, assets=1% and profit =5% everything is material? right?
2.In an exam if the unadjusted error is related to depreciation we will calculate materiality on profits and assets not on revenue?
We have to link our materiality with FS?
In an exam they have given us all 3 figures, assets, profit and revenue that is just for confusion we can ignore the on we don’t need and we don’t need to calculate the materiality for the one which does not cause any effect.
Eg: In case of depreciation we can discard revenue,
Inventory will effect on assets and profit?
Allowance for receivables will effect assets?
Interest payable omiitted error will effect profit?
Error in sale invoice processing resulting in understatement of sales will effect revenue and profit?Also, if the materiality calculation is 5% of profit bracket 5-10%, will it be material?
1. Yes and since it is “< 5%” which is presumed to be not material you can take 5% to be material.
2. Depreciation on the previous post was just an illustration. The double entry for depreciation is:
Dr Depreciation expense (affects profit)
Cr Accumulated depreciation (offset against cost to give carrying amount in SoFP) – so affects total assets.
It CANNOT affect revenue!
What I am saying is don’t calculate every %/all 3 measures – this “scatter-gun approach” is a waste of time and shows that you don’t understand how a misstatement relates to the financial statements.
All 3 figures are given not “for confusion” but because this is the choice and the exam skill is to understand what is relevant.
Eg: In case of depreciation we can discard revenue, YES
Inventory will effect on assets and profit? ALWAYS
Allowance for receivables will effect assets? OF COURSE – same principle as depreciation)
Interest payable omiitted error will effect profit? ALSO assess against total assets (because this = total equity + total liabilities) – we don’t ignore materiality of liabilities
Error in sale invoice processing resulting in understatement of sales will effect revenue and profit? YESThank you very much for clarity sir.
One last question just for clarification again, in above calculation for depreciation even if the it is material in case of revenue we will consider as immaterial because it does not effect revenue.
Am I right?It cannot be “material in case of revenue” because it is unrelated to revenue – so this calculation should be ignored.
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