342 Week 11
10.31 Materiality
You are nearing completion of the 31 December 2015 audit of ABC Wholesalers Ltd. The figures below have been extracted from the final draft financial report.
During you review of the audit files, you note the following items recorded on the summary of audit differences.
1. ABC Wholesalers has been involved in a long-running dispute with the taxation authorities in relation to the amount of sales tax payable on certain lines of merchandise. The case was resolved this year in favour of the taxation authorities. The court ruled that ABC Wholesalers, as well as paying the outstanding taxes, must pay a non-tax-deductible fine of $420,000.
2. Sales cut-off at one of ABC Wholesaler’s stores was incorrect, resulting in a large sale of inventory made early in January 2015 being recorded in the 31 December 2014 year-end. The cost price of the inventory sold was $250,000. ABC Wholesalers marks up inventory by 40%.
3. Purchases cut-off at the same store was also incorrect, resulting in a large purchase of inventory made in late December not being recorded until January 2015. The invoice price of the inventory purchased was %5,950,000.
You also note that the planning materiality level was set by the audit manager at $200,000.
Question:
a) Consider items 1-3 independently. State whether the amounts involved would be considered material for the purpose of issuing an auditor’s report. Give reasons.
b) Explain the relevance, if any, of the planning materiality level to your decisions in a).
You are nearing completion of the 31 December 2015 audit of ABC Wholesalers Ltd. The figures below have been extracted from the final draft financial report.
During you review of the audit files, you note the following items recorded on the summary of audit differences.
1. ABC Wholesalers has been involved in a long-running dispute with the taxation authorities in relation to the amount of sales tax payable on certain lines of merchandise. The case was resolved this year in favour of the taxation authorities. The court ruled that ABC Wholesalers, as well as paying the outstanding taxes, must pay a non-tax-deductible fine of $420,000.
2. Sales cut-off at one of ABC Wholesaler’s stores was incorrect, resulting in a large sale of inventory made early in January 2015 being recorded in the 31 December 2014 year-end. The cost price of the inventory sold was $250,000. ABC Wholesalers marks up inventory by 40%.
3. Purchases cut-off at the same store was also incorrect, resulting in a large purchase of inventory made in late December not being recorded until January 2015. The invoice price of the inventory purchased was %5,950,000.
You also note that the planning materiality level was set by the audit manager at $200,000.
Question:
a) Consider items 1-3 independently. State whether the amounts involved would be considered material for the purpose of issuing an auditor’s report. Give reasons.
b) Explain the relevance, if any, of the planning materiality level to your decisions in a).