Sample/practice exam March, questions and answers PDF

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Materiality – Cloud 9 – Wk 5 Team Name: YWTJ PART 1 - MATERIALITY (a)

Using the 30 September 2016 trial balance (see Appendix of etext), calculate planning materiality for the year ending 30 December 2016 and include the justification for the basis that you have used for your calculation. Tip: Refer to Section 4.2 of eText, ASA320 and use google to read about materiality or watch relevant YouTube videos that discuss planning materiality such as”Amanda Loves to Audit” or see for example: https//www.youtube.com/watch?v=7Qqia_DauFE (selecting the appropriate base) https//www.youtube.com/watch?v=cYdyVzLs9Jl https//www.youtube.com/watch?v=NaU3B1_7txc

Trial Balance base generally are total assets, liability, expense and revenue. We have selected Revenue as the basis for calculating planning materiality. Profit is not an appropriate basic because Cloud 9 is projecting a loss result for the year ended. The entity is essentially revenue share in Australian market. The revenues used should be the aggregate of store and wholesale revenues as this drives the normal operations of the business. However, as the other revenues are immaterial, their inclusion in the base figure would not materially impact the planning materiality calculation. Revenues should be annualised to represent a full year of operations. Based on those, planning materiality should be set at 5% Revenue – store 2,764,163 Revenue – wholesale 45,594,829 Total revenue from normal operations 48,358,992 Annualised revenue 59,938,973 Planning materiality at 5% 2,996,949 Page 1

Materiality – Cloud 9 – Wk 5 (b)

Explain why the concept of materiality is important for auditors. (word limit – 200 words)

The concept of materiality is therefore fundamental to the audit. It is applied by auditors at the planning stage, and when performing the audit and evaluating the effect of identified misstatements on the audit and of uncorrected misstatements, if any, on the financial statements. While materiality is first determined at the planning stage, auditors need to be mindful that circumstances may change during the audit or some of the audit findings may mean that the initial assessments have to be reassessed. Moreover, in accounting and auditing have basic materiality. The audit also includes reasonable assurance that the financial statements are free of material misstatement. Audit services provide assurance that reporting accounts are free of errors on the weight of the edge. Materiality is the term used to show the importance of an information (an accountant) in a financial report. Info is considered to be materiality means that lack of information or inaccurate information will affect the users of their financial statements; Concept used in testing to establish materiality. For smaller errors than the materiality category, the auditor may consider exceeding the excess threshold of the business, and for errors greater than the weight, the auditor will require professional for correcting. The risk dependency is the root of the audit and each audit of each company.

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