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

Case: Sundaram Textiles Ltd has revenue of Rs 400 crore and profit before tax of Rs 20 crore. The auditor, CA Meena, sets overall materiality at 5% of profit before tax and performance materiality at 75% of overall materiality. In the Related Party note, directors' remuneration is a matter of governance sensitivity to users. What is performance materiality, and what is the most appropriate approach to the directors' remuneration disclosure?

Overall materiality is 5% of Rs 20 crore, which is Rs 1 crore, so performance materiality at 75% is Rs 0.75 crore. For qualitatively sensitive items such as related party and directors' remuneration disclosures, the auditor may set a lower materiality level.

  1. APerformance materiality is Rs 0.75 crore; a lower threshold may be applied to related party and directors' remuneration disclosures since they are qualitatively sensitiveCorrect
  2. BPerformance materiality is Rs 1.00 crore; no lower threshold can apply to any disclosure
  3. CPerformance materiality is Rs 0.75 crore; a threshold can never be lower than overall materiality for disclosures
  4. DPerformance materiality is Rs 15 crore; related party disclosures are always ignored if below it

Explanation

Overall materiality = 5% x 20 crore = Rs 1 crore. Performance materiality = 75% x 1 = Rs 0.75 crore. SA 320 permits a lower materiality level for particular classes of transactions or disclosures where users' expectations make smaller misstatements significant, such as related party and remuneration disclosures. Option B uses overall materiality and bars lower levels.

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