1. Define materiality and determine how the level of materiality is assessed.
You are the audit manager of Matfine & Co and are reviewing the key issues identified in the files of two audit clients as follows:
- Pito Industries Co (Pito)
Pito’s year-end was 31 March 2019 and the draft financial statements show revenue of $32·2 million, receivables of $6·1 million and profit before tax of $3.4 million. The fieldwork stage for this audit has been completed. A customer of Pito owed an amount of $375,000 at the year-end. Testing of receivables in April highlighted that no amounts had been paid to Pito from this customer as they were disputing the quality of certain goods received from Pito. The finance director is confident the issue will be resolved and no allowance for receivables was made with regards to this balance.
- Albo Trading Co (Albo)
Albo is a new client of Matfine & Co, its year-end was 31 January 2019 and the firm was only appointed auditors in February 2019, as the previous auditors were suddenly unable to undertake the audit. The fieldwork stage for this audit is currently ongoing. The inventory count at Albo’s warehouse was undertaken on 31 January 2019 and was overseen by the company’s internal audit department. Neither Matfine & Co nor the previous auditors attended the count. Detailed inventory records were maintained but it was not possible to undertake another full inventory count subsequent to the year-end. The draft financial statements show a profit before tax of $2·1 million, revenue of $11·2 million and inventory of $625,000.
Required:
1. Define materiality and determine how the level of materiality is assessed.
2. What conditions will affect the auditor’s determination of materiality? 3) For each of the two issues (Pito and Albo):
a. Discuss the issue, including an assessment of whether it is material;
b. Recommend ONE procedure the audit team should undertake to try to resolve the issue;
c. Describe the impact on the audit report if the issue remains unresolved.
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