You are the manager responsible for the audit of a newly incorporated company, Trojan Limited (TL). Following
Question:
You are the manager responsible for the audit of a newly incorporated company, Trojan Limited (TL). Following are the extracts from the first draft financial statements of TL for the year ended 31 December 2019:
Rs. in million
Revenue 12,000
Profit before tax 72
Total assets 13,000
Total liabilities 7,000
Since this is the first year of operation, the profit before tax was quite low. However, as per the management’s projection, the profit before tax would grow exponentially over the next three years. Your audit team has determined the materiality on the basis of profit before tax for the year ended 31 December 2019. In view of the audit team profit before tax is the main performance indicator for TL’s board of directors.
Required:
Discuss the appropriateness of the benchmark used by your team in determining the materiality and suggest the alternative(s) available to your team.
