(a) Define materiality as it is used in audit reporting. What conditions will affect the auditor’s determination of materiality?
(a) Define materiality as it is used in audit reporting.
What conditions will affect the auditor’s determination of materiality?
(b) Materiality in Planning and Performing an Audit provides guidance on the concept of
materiality in planning and performing an audit.
Required:
Define materiality and determine how the level of materiality is assessed.
c) Red Plus Ltd operates a radio station and also produces CD’s for new and upcoming Singers and Deejays both local and international and local artistes. Red Plus Ltd have been a client for Auditing firm TIU for a number of years. The manager in overall charge of the audit has been discussing the audit plan with the audit team, of which you are a member, prior to commencement of the work.
The audit manager has informed the team, among other things, that there has been a growing interest in poetry generally and that the company has acquired a reputation for publishing poets who are still relatively unknown.
During your audit you determine:
(i) Contracts with the singers state that they are given a royalty of 5% on sales. Free copies of their CD’s are provided to the singers and to some organisations such as radio station libraries and to others, such as reviewers and music students. These free copies do not attract royalties.
(ii) The computerised customer master file contains a code indicating whether a despatch is to earn a royalty for the author. This code is shown on the sales invoice and despatch note when they are prepared.
(iii) A computerised royalty’s file is held, all entries therein bearing the invoice number and date.
(iv) The company keeps detailed statistics of sales made, including trends of monthly sales by type of customer.
(v) With the increase in technology, the CDS are sold online however, when a CD is sold the customer is not able to return same.
A material figure in the statement of financial position of Red Plus Ltd is the amount attributed to inventory of CDS that have been ordered but not yet delivered to customers.
Required:
State FOUR inherent risks that may affect the inventory figure and suggest ONE control to mitigate each risk.
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