Materiality You are nearing completion of the 31 December 2021 audit of ABC Wholesalers Ltd. The figures
Question:
Materiality You are nearing completion of the 31 December 2021 audit of ABC Wholesalers Ltd. The figures below have been extracted from the final draft financial report:
$'000
Operating profit before income tax 5 722
Operating profit after income tax 3 541
Total revenue 718 635
Current assets 253 881
Non-current assets 216 752
Total assets 470 633
Current liabilities 103 333
Non-current liabilities 132 760
Total liabilities 236 093
Equity 234 540
During your 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 2021 being recorded in the 31 December 2020 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 2021. 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.
Required
(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)?
Financial Accounting and Reporting
ISBN: 978-0273744443
14th Edition
Authors: Barry Elliott, Jamie Elliott