ACCA Strategic Professional · Advanced Audit and Assurance (International) · Completion and final review

Drayton Co has profit before tax of $2,000,000 and overall materiality of $100,000. Uncorrected misstatements total: receivables overstated $45,000, expenses understated $40,000, and a related party disclosure omitted. Management also proposes to reverse an earlier correction of $30,000 that reduced revenue. Which conclusion is most appropriate?

The auditor should assess materiality using both size and nature. The $85,000 total is near the $100,000 threshold, a related party disclosure is missing, and reversing a prior correction suggests possible bias. The auditor should therefore reconsider whether the misstatements are material and whether the audit approach remains appropriate.

1. AThe auditor should wait for the management representation letter before deciding on materiality
2. BQuantitative total of $85,000 is below materiality, so no further consideration is needed
3. CThe auditor should reassess whether the misstatements are material by considering both quantity and nature, including the omitted disclosure and any indication of bias, and should reconsider whether the audit approach and materiality remain appropriateCorrect
4. DBecause management has now offered to reverse an adjustment, the omitted disclosure is automatically immaterial