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Question 1 · Single question · Syllabus B32 marks

Audit risk and materiality

At planning, Langdon Co's auditor set materiality at 5% of forecast profit before tax of $3,600,000, and performance materiality at 75% of materiality. Tolerable misstatement for each test is set equal to performance materiality. A test of trade receivables at the interim audit projected a misstatement of $100,000. The draft financial statements now show profit before tax of $2,400,000, and the firm's policy is to revise materiality on the actual figure, keeping the same percentages.

What should the auditor conclude about the receivables test? (2 marks)

The projected $100,000 exceeds revised performance materiality of $90,000, so more work on receivables is neededNo further work, as a revised materiality applies only to tests performed after the revision is made, not to work already doneNo further work, as a projected misstatement is compared with materiality of $120,000, never with performance materialityQualify the opinion, as $100,000 exceeds revised performance materiality

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