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Sir,
I have the below two scenarios and would like to know how materiality should be calculated.
1. In a risk question , the examiner only gives information of the current year for for the first 10 months of the year. In this case to calculate materially, since the revenue, PBT and assets are only for 10 months and not 12, are we expected to extrapolate the figures (i.e Divide the above by 10 and x 12 to get the full year , and then calculate materially or use the information from the previous 12 months? , how shall we approach this?
2. Is it ever possible that for example the PBT figures given is a loss i.e negative, in this case how shall we calculate the materiality? Since dividing a positive figure with a negative figure would not make much sense..
Thank you.
1. Yes gross up revenue and PBT for 10 months by x 12/10 but NOT assets – that would be meaningless. You could add the additional 2 months PBT on to net assets (as nearest approximation to additional retained earnings) – though I doubt that’s expected because materiality is a matter of judgement in any case – based on draft accounts it cannot be too “exact”.
2. You could use % revenue for profit and loss items (as the most relevant “driver” of reported profit/(loss)). But if a reported loss was not a particular issue (e.g. in a wholly owned subsidiary that is known to be loss-making but supported by the parent for operational reasons of the group as a whole), then % assets.
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