Question

You are the auditor of a publicly listed company. In the kickoff meeting for the audit 2018, the chairman of the board of director, who is also a controlling shareholder presented to you the following financial information:

	Budget for the year of 2019 (based on last 5 months’ trading results of 2018) $ million	Unaudited financial information for the year ended 31 December 2018 $ million
Revenue	5,000	4,500
Total assets	5,000	4,500
Net assets	2,500	2,250
Profit before income tax expense	510	400

The worldwide economy is currently static, and consumer confidence has a little bit falling in the first quarter 2019. The company has an internal audit function. In previous years, your assessment of the system of internal control was that it was effective. Your experience with the company in past years has shown that its forecasts are generally reliable.

Required:

a) What qualitative factors referred to in the information given above about Amusement will you consider in determining preliminary materiality for the 2018 audit? How will these factors affect your assessment of materiality?

You are required to present your answer with (1) Qualitative factors, (2) Effect on materiality

b) What quantitative factors referred to in the above information about Amusement will you consider in determining preliminary materiality for the 2018 audit? Why?

Answer 1

A.

Qualitative factors to consider in the auditor's evaluation of the materiality of uncorrected misstatements, if relevant, include the following:

• The potential effect of the misstatement on trends, especially trends in profitability.
• A misstatement that changes a loss into income or vice versa.
• The effect of the misstatement on segment information, for example, the significance of the matter to a particular...
• The potential effect of the misstatement on the company's compliance with loan covenants, other contractual

The following are the qualitative factors of materiality that could help both auditors and accountants (practitioners) to identify and assess.

Here are they:

• The misstatement or omission that reverses the loss to profit or profit to loss
• The potential effect of the misstatements on the company’s policy.
• The potential effect of the misstatements that incompliant with local regulation, laws, agreements, loan covenants, or similar.
• Misstatements or omissions that potentially affect the company’s future benefits.
• The misstatements that adversely turn one transaction or event to others which subsequently affect one the user’s information.
• The misstatements or omission that is really necessary for the users’ decision making.

Qualitative materiality factors

• Qualitative factors to consider in the materiality evaluation for financial reporting may include reaching budget or other projections, triggering or increasing executive compensation, masking a change in financial results or other trends, and achieving compliance with debt and other covenants.