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Need some assistance on the Kaplan Exam Kit Q43. ( Written Below)

This topic has 1 reply, 2 voices, and was last updated 6 years ago by Kim Smith.

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November 19, 2018 at 11:32 am #485221
thezadzzz
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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?
November 19, 2018 at 12:31 pm #485226
Kim Smith
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Assuming that option A was $1.5m – this amount is 16% of profit (1.5/9.5 x 100) and 1.2% of revenue (1.5/124 x 100) i.e. both are too high when compared with the standard thresholds (see page 31 of the notes).
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