- October 29, 2015 at 5:00 pm #279553
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.
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?
JemmaOctober 29, 2015 at 6:25 pm #279588
I don’t see how you have arrived at your observation.
Component materiality for component 1 is $1,200 and performance materiality for that component is $60
For the group, component materiality is $600 and performance materiality is $30
So why you believe “that the amount of $10mil is material to both the component company and the group?” has got me beaten.
Sorry Jemma 🙁October 29, 2015 at 9:23 pm #279626
Its $10mil .. and the figures are shown in 000s (thousands). I dont know why I dont understand this…
Do you mind showing the calculations as you understand it please?
jemmaOctober 30, 2015 at 5:39 am #279645
Ah! Now I see the problem and it’s not your fault! I believe that whoever published this (Kaplan? BPP? author of Technical Article) has made an error with their “000’s”
I believe that whoever wrote this intended the figure to be $10(000)
$10m is a ridiculous amount to be using in this example! It’s 67% greater than combined profit and, even if you ignore the loss, it’s still 50% of combined profits.
Well spotted!October 30, 2015 at 6:56 am #279651
Ahh few … I thought I was being really dum. .. I know some of the answers in books contained a few errors here and there but technical articles is very naughty of Acca especially as they say they have been updated!!
thank you for putting my mind at rest I can carry on reading the rest of it now :0)October 30, 2015 at 7:43 am #279653
I’m pleased to have helped – I just hope that I’m correct in my beliefs!
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