CA Final · Advanced Auditing, Assurance and Professional Ethics · Sustainable Development Goals (SDG) & Environment, Social and Governance (ESG) Assurance

CA Firm Arora & Co is engaged for reasonable assurance on a sustainability metric of Sagar Ports Ltd, for the first time, and has also been told the same metric will be used by a lender for a sustainability-linked loan with an interest step-up if a target is missed. During planning the team notes that the metric is near the target threshold. Which approach is most appropriate?

The firm should recognise the incentive for management bias created by the interest step-up, take qualitative factors and closeness to the threshold into account in setting materiality, and perform more rigorous procedures. Revenue-based materiality alone would be inappropriate, and the lender's checks do not reduce the firm's responsibility.

1. ASet materiality using only a percentage of revenue, as for financial statements
2. BRecognise the elevated risk of management bias, consider qualitative factors and the proximity to the threshold when setting materiality, and respond with more rigorous proceduresCorrect
3. CReduce procedures since the lender will do its own verification
4. DConvert the engagement to limited assurance to lower cost