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Dear tutor,
I am not sure why ACCA has considered revenue figure as a relevant benchmark of materiality for expenses in multiple places in this question as quoted:
1) “maintenance costs representing 10·4% of revenue this year, compared to 11·7% in the previous year.”
2) “These trends should be discussed with management, especially the staff costs, as this alone is highly material, representing 28·9% of projected revenue.”Further, can I calculate materiality on $ 0.5 million (as half of 1 million is charged correctly to this year and half of it is incorrect which should be considered as misstatement) which is also material as it represents 7.2% of projected PBT for the year?
ACCA answer is: “The $1 million paid to the celebrity athlete is material, representing 14·4% of projected net profit for the year.”Thanks and regards,
An answer can differentiate between a materiality % calculation ($x is y% of benchmark and therefore material/not material) and a % or ratio comparison (analytical procedure) in risk assessment.
So in 1) I think this a comparison for risk assessment.
In 2), I agree with you, I would use % of PBT to comment on materiality of the staff costs. I might have used % staff costs to revenue to consider risk of misstatement – 20X9 28.9% compared with 20X8 31.8% – and from this conclude that the projection of staff costs may be understated or revenue overstated.Regarding your last point – yes you can and I think it is more relevant to calculate the materiality of the misstatement – where you can determine what the misstatement is – rather than the materiality of the item.
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