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CA Final · Integrated Business Solutions (Multidisciplinary Case Study with Strategic Management) · Advanced Auditing, Assurance and Professional Ethics

Case: Deccan Steels Ltd reported revenue of Rs 400 crore and profit before tax of Rs 20 crore. Its auditor sets overall materiality at 5% of profit before tax and performance materiality at 75% of overall materiality. During the audit, the company also proposed a Rs 0.9 crore capitalisation of repairs as plant, which management refuses to correct. Under Ind AS this is a clear misstatement of expense. What is the performance materiality and how should the auditor treat the Rs 0.9 crore item?

Performance materiality is Rs 0.75 crore, being 75% of overall materiality of Rs 1 crore. The Rs 0.9 crore item is not clearly trivial, so the auditor accumulates it with other misstatements, requests correction, communicates it to those charged with governance, and evaluates its effect on the opinion.

  1. ARs 0.75 crore; it is below overall materiality of Rs 1 crore, so it is irrelevant and need not be accumulated
  2. BRs 1 crore; it is a misstatement below materiality and can be ignored
  3. CRs 0.75 crore; the item exceeds performance materiality, so it must be accumulated and considered along with other misstatements, and communicated to those charged with governanceCorrect
  4. DRs 0.9 crore; the item equals performance materiality so the audit report must be adverse

Explanation

Overall materiality = 5% of 20 crore = Rs 1 crore. Performance materiality = 75% of 1 crore = Rs 0.75 crore. The Rs 0.9 crore error is not clearly trivial, so it is accumulated, uncorrected misstatements are communicated to those charged with governance, and the effect on the opinion is evaluated. Ignoring it merely because it is under overall materiality is wrong, as aggregation with others may breach materiality.

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