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CA Final · Advanced Auditing, Assurance and Professional Ethics · Review of Financial Information

A practitioner reviewing the financial statements of Aarav Retail Ltd, prepared for general use, is deciding how to set materiality. A junior suggests basing it on the specific needs of a single lender whose information needs differ widely from other users. Under SRE 2400 (Revised), what is the correct position?

Materiality is a matter of the practitioner's professional judgment. Unless the financial statements are intended to meet the particular needs of specific users, the possible effect of misstatements on specific users, whose information needs vary widely, is not ordinarily considered, so one lender's needs should not drive materiality.

  1. AMateriality must always be based on the largest lender's requirements
  2. BUnless the statements are intended to meet the particular needs of specific users, the possible effect of misstatements on specific users whose needs vary widely is not ordinarily consideredCorrect
  3. CMateriality is determined by management, not the practitioner
  4. DMateriality should consider each individual user's needs equally

Explanation

The standard states that materiality is a matter of professional judgment affected by perception of users' needs, but unless the statements are for specific users, the effect of misstatements on specific users with widely varying needs is not ordinarily considered. Hence basing it on one lender is not appropriate for general-purpose statements.

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