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ACCA Strategic Professional · Advanced Audit and Assurance (International) · Planning, materiality and assessing the risk of material misstatement

Delta Retail plc has a stable profit before tax of $4.0m, revenue of $80m and total assets of $50m. The audit manager uses 5% of profit before tax as overall materiality and sets performance materiality at 70% of that. During the audit, Delta's profit falls to $3.0m after a late adjustment. Under ISA 320, what should the auditor do?

The auditor should revise materiality to $150,000, being 5% of the lower profit of $3.0m, and reconsider performance materiality and further audit procedures. ISA 320 requires materiality to be revised when new information would have led to a different amount at planning.

  1. AKeep materiality at $200,000 because it was set at planning and cannot be changed
  2. BRevise materiality to $150,000 and consider whether performance materiality and the nature, timing and extent of procedures remain appropriateCorrect
  3. CIncrease materiality to reflect the higher risk of misstatement
  4. DSwitch the benchmark to total assets and ignore the previous figure

Explanation

Original materiality was 5% x $4.0m = $200,000. ISA 320 requires revision if information arises during the audit that would have led to a different figure. 5% x $3.0m = $150,000, so performance materiality (70%) falls to $105,000 and the further procedures must be reconsidered. Option A wrongly treats the planning figure as fixed.

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