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

Case: Meenakshi Textiles Ltd has a turnover of Rs 400 crore. Its auditor, CA Divya, plans materiality at 1% of turnover, i.e. Rs 4 crore, and performance materiality at 75% of that. During the audit, she finds an uncorrected misstatement of Rs 2.5 crore in trade receivables and a further misstatement of Rs 1 crore in revenue cut-off, both unrelated and not indicating fraud. Which statement best follows from the case facts?

Performance materiality is Rs 3 crore, being 75 per cent of Rs 4 crore. The aggregate uncorrected misstatements of Rs 3.5 crore exceed it, though not overall materiality. The auditor must evaluate them in aggregate and reassess the risk of further undetected misstatements and the adequacy of the audit plan.

  1. APerformance materiality is Rs 3 crore and the aggregate uncorrected misstatements of Rs 3.5 crore exceed it but not overall materiality, so she should reassess the risk of further undetected misstatementsCorrect
  2. BPerformance materiality is Rs 3 crore and the misstatements need no evaluation because each is individually below Rs 4 crore
  3. CPerformance materiality is Rs 3.5 crore and the audit is complete
  4. DPerformance materiality is Rs 1 crore because it is set at the lowest misstatement found

Explanation

Performance materiality = 75% x Rs 4 crore = Rs 3 crore. Aggregate uncorrected misstatements are Rs 2.5 crore + Rs 1 crore = Rs 3.5 crore, which exceeds Rs 3 crore but is below Rs 4 crore. Misstatements must be evaluated in aggregate, and the auditor should reconsider whether the risk of undetected misstatements still allows the audit plan to stand.

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