- This topic has 1 reply, 2 voices, and was last updated 6 years ago by
.
- Posts
(Context) You are planning the audit of Veryan Co,a new audit client.Veryan operates in the oil & 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 financialyear is $9.5m based on revenues of $124m.
Q43. Which of the following is the LEAST appropriate materiality level to be used in the audit of Veryan?
Answer: A
A is 16% of profit and 1.2% of revenue and is therefore too high based on the standard benchmark calculations. As Veryan is a new audit client it is likely that materiality will be set at the lower end of the materiality scale to reflect the increased detection risk.I’m not understanding how the calculation was formed to reach the answer?
Hi,
I have the Kaplan book so can help. I would advise for any other questions you may want help with – give the options of answers as it would be difficult for anyone to explain the calculation without them as in this question.
So the Least appropriate would be A 1.5m as that is the highest amount given in the drop down. Materiality is worked out as a % of PBT, Revenue and Assets. So in this question they give you PBT and revenue. So 1.5m/9.5 = 16% profit and and 1.5/124= 1.2% Rev
Remember that amounts are usually material when they form 0.5-1% Rev, 5-10% PBT and 1-2% assets
- You must be logged in to reply to this topic.