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

Case: Meghna Steels Ltd has Rs 80 crore turnover. The auditor, CA Iyer, determined overall materiality of Rs 80 lakh (1% of turnover) and performance materiality at 75% of it. While testing, the auditor found uncorrected misstatements in individual items of Rs 6 lakh, Rs 9 lakh and Rs 5 lakh, all clearly trivial threshold being Rs 4 lakh. Management refuses to correct any of them. What is the correct approach under SA 450 and SA 320? Which statement correctly reflects the performance materiality and the evaluation of these misstatements?

Performance materiality is 75 percent of Rs 80 lakh, that is Rs 60 lakh. The auditor must accumulate all misstatements above the clearly trivial threshold, here Rs 20 lakh in total, evaluate their combined effect on the opinion, and communicate uncorrected ones to those charged with governance.

  1. APerformance materiality is Rs 60 lakh; the auditor accumulates the misstatements above the Rs 4 lakh threshold (Rs 20 lakh) and evaluates their effect on the financial statements and audit opinionCorrect
  2. BPerformance materiality is Rs 20 lakh; the misstatements are ignored as they are individually below overall materiality
  3. CPerformance materiality is Rs 80 lakh; the misstatements need not be communicated to those charged with governance
  4. DPerformance materiality is Rs 1.05 crore; the misstatements are cleared automatically

Explanation

Performance materiality is 75% x 80 lakh = Rs 60 lakh. Misstatements above the clearly trivial threshold (6+9+5 = Rs 20 lakh) are accumulated and evaluated, and uncorrected ones are communicated to those charged with governance. Ignoring them because each is below overall materiality ignores aggregation.

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