Technical article for Group audits

EXAMPLE 1
Imagine that financial statements materiality is taken to be 10% of profit or loss for each entity within a group and performance materiality is set at 0.5% of profit. Imagine that a group has a parent company and two components, one of which is profit making and one of which is loss making:

$’000s Parent Subsidiary 1 Subsidiary 2 Group
Proft 2,000 12,000 (8,000) 6,000
Component materiality @ 10% 200 1,200 800 600
Performance materiality @ 0.5% 10 60 40 30

If subsidiary 1 were audited by another firm using the same materiality calculation method as the parent, an unadjusted error of $10m would correctly result in issuance of an unmodified audit opinion on the financial statements of that individual company. However, the effect of losses elsewhere in the group would mean that although this error would not be material at the component level, it would be material at the group level. Since it is only likely to be the parent auditor who has this overview of the group, the group engagement team must communicate materiality figures to component auditors in advance of audit work commencing. In this example, the maximum component materiality figure that the group auditor could communicate to the component auditors would be 600, but it would be wise to select a lower figure than this, in order to reduce to a tolerable level the risk of errors in both component companies together exceeding 600.

In the exam, if you are given extracts from draft financial statements, it’s often a good start to recommend and briefly explain a figure for materiality.

Hi

Please see the information above taken from the article on group auditing.

Could you explain this too me as I am looking at it and thinking that the amount of $10mil is material to both the component company and the group?

Many thanks
Jemma