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Q.You r planning the audit of veryan co,a new audit client. Veryan operates in the oil and gas exploration industry. It has been in existence for 30 years and has grown its revenue at an average of 12% per annum. During your planning meeting you were informed that the forecast profit before tax for this financial year is $9.5m based on revenue of $124m.
Which of the following is the least appropriate materiality level to be used in the audit of veryan?
A $ 1.5m
B. $ 1.0m
C. $ 750,000
D. $ 450,000Answer given is A but I dont understand on what basis will we determine. Isnt it judgemental?
0.5% to 1% revenue is 0.62 to 1.24
5 to 10% profit is 0.475 to 0.95So, I have no idea either why A was chosen. Looks like an error.
No, I didn’t! Thanks.
Option A is too high as it is above both ranges,
B and C are ok.
D is below both ranges, but we are dealing with a new client where the audit risk is greater, so more caution might be wise.
HTH
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