Question

Your audit team has set the following benchmarks and percentages for the calculation of materiality for the financial statement as a whole of a client you are auditing:

            Value                                                                          %

            Profit before tax                                                          5

            Profit after tax                                                      5 – 10

            Gross Profit                                                         0.5 – 1

            Revenue                                                             0.5 – 1

            Total Assets                                                         1 – 2

            Net Assets                                                            2 – 5

During the audit the following items listed (1 – 5) below were considered for their materiality, given that the client’s account values were: Revenue – GHS3.00m; Total Assets – GHS2.50m; Total Liabilities – GHS1.50m; Cost of Sales – GHS1.8m; Profit before tax – GHS0.40m; and Tax – GHS0.10m.:

1. An invoice for GHS18,000 worth of goods sold could not be found.

2. Goods purchased in December, GHS7,500, have been excluded from stocks.

3. Cost of electricity for the month of December, GHS10,000, has been omitted from the expenses.

4. An investment of GHS40,000 cannot be retrieved from a defunct Savings and Loans company.

5. A contingent liability of GHS15,000 has not been provided for nor noted.

Required: Determine the materiality of the items listed in Nos. 1- 5 above and explain your

decision.

Answer 1

Answer 1. An invoice for GHS18,000 worth of goods sold could not be found.

Materiality would be of gross profit 0.5 to 1 as the lost invoice would affect the gross profit

The cost of sales is GHS1.8m, so materiality level would be GHS 9000 to GHS 18000. So the above invoice can be ignored as it is within the materiality limit.

Ans 2. Goods purchased in December, GHS7,500, have been excluded from stocks.

Materiality would be of total assets 1 to 2 as the stock that is excluded is not included in total assets.

Total assets are worth GHS 2.5m, so materiality level would be GHS 25000 to GHS 50000.

So the above exclusions can be ignored as it is within the materiality limit.

Ans 3. Cost of electricity for the month of December, GHS10,000, has been omitted from the expenses.

The above omission would affect profit before tax, materiality level is 5%.

The profit before tax is 0.5m so the materiality level is GHS 25000. The cost of electricity is much below the materiality level and hence can be ignored.

Ans 4) An investment of GHS40,000 cannot be retrieved from a defunct Savings and Loans company.

Materiality would be of total assets 1 to 2 as the investment cannot be retrieved from a defunct Savings and Loans company.

Total assets are worth GHS 2.5m, so materiality level would be GHS 25000 to GHS 50000.

The above is above the materiality limit and substantive procedure need to be performed.

Ans 5. A contingent liability of GHS15,000 has not been provided for nor noted

A contingent liability is not a balance sheet item and hence can be ignored, since the amount is also not huge.