Question

One of the clients of MMM Chartered Accountants operates a restaurant. From January of the current year, the business has consistently paid its suppliers late, well in excess of the suppliers' normal credit terms. This has resulted in some suppliers requesting cash on delivery from the business. The auditor has reviewed the correspondence between the business and its bank and finds that the business has been experiencing cash flow problems for two years. Required: (a) Explain why determination of materiality is a matter of auditor judgment. Refer to both qualitative and quantitative materiality assessments . ( (b) Explain whether (and, if so, how) the information provided impacts on the auditor's assessment of preliminary materiality .

Answer 1

Ans: Materiality is a subject of professional judgement,it differ from person to person.

Materiality depends upon circumstances prevailed, it can be quantitative and qualitative aspect.

as given in the question client of firm is making payment late than normal credit period, this is material from the point view of auditor, as it lead to cash on delivery bais from supplier, due to less credit worthiness of client.

in terms of quantitative some misstatement of particular amount may be material or not according to each person judgement according to circumstances.

As the auditor reviewed thre correspendence and find that business has been experiencing cash flows from 2 years ,it

affects auditor's preliminary materiality,

As auditor would consider cash related items more mterial and check more control exists on cash items.

and will set materiality level low amount for cash items , as client is facing cash problem.