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CA Intermediate · Auditing and Ethics · Completion and Review

Anand & Co audits Veda Retail Ltd. At the audit completion stage, uncorrected misstatements are: overstatement of inventory Rs 4 lakh, understatement of expenses (accruals) Rs 3 lakh, and overstatement of revenue Rs 2 lakh due to cut-off error. Overall materiality is Rs 12 lakh, performance materiality Rs 9 lakh, and the clearly trivial threshold is Rs 60,000. Profit before tax as reported is Rs 1.5 crore. Management declines to correct any of them. Which evaluation is correct under SA 450?

The aggregate profit overstatement is Rs 9 lakh, below overall materiality of Rs 12 lakh, but the auditor must still weigh qualitative factors and undetected misstatement risk. All non-trivial uncorrected misstatements must be communicated to those charged with governance with a request to correct, and none can be ignored individually.

  1. AThe misstatements aggregate Rs 9 lakh, which is within performance materiality, so the auditor may conclude they are immaterial without further consideration
  2. BThe aggregate effect on profit is Rs 9 lakh overstatement, below overall materiality, but the auditor must still consider qualitative factors and whether the aggregate could be material, and must communicate them to those charged with governance and request correctionCorrect
  3. CThe misstatements offset each other, so only the Rs 4 lakh inventory item needs to be communicated
  4. DBecause each item is below materiality of Rs 12 lakh, none need be accumulated or communicated

Explanation

Profit overstatement is 4 + 3 + 2 = Rs 9 lakh, all pointing the same way, and none is clearly trivial. It is below overall materiality of Rs 12 lakh but close to it, so the auditor must evaluate qualitative factors and the risk of undetected misstatements. SA 450 requires communicating all uncorrected misstatements (other than clearly trivial) on a timely basis to those charged with governance and requesting correction. Performance materiality is not the test for concluding immateriality.

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