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CA Intermediate · Auditing and Ethics · Audit Strategy, Audit Planning and Audit Programme

During the audit of Himalaya Cements Ltd. for the year ended 31 March, the auditor set overall materiality at ₹50 lakh at the planning stage. In February, new information shows that actual profit before tax will be much lower than the budget used for the benchmark, and materiality would have been ₹30 lakh had this been known. Misstatements found so far total ₹35 lakh. What is the correct audit response under SA 320 and SA 300?

The auditor should revise materiality because information arose that would have led to a lower figure, reassess the risks of material misstatement and change the nature, timing and extent of further procedures. The plan is not fixed, and the Companies Act does not prescribe materiality.

  1. ARevise materiality, reassess risk of material misstatement and modify the nature, timing and extent of further procedures as requiredCorrect
  2. BRetain ₹50 lakh since the plan cannot be changed once approved
  3. CRevise materiality only after issuing the audit report
  4. DIgnore the information because materiality is fixed by the Companies Act

Explanation

SA 320 requires the auditor to revise materiality if information becomes known during the audit that would have led to a different amount initially. The revision may require changes to the assessment of risk and further audit procedures, and the audit plan is updated as necessary under SA 300. The Act does not fix materiality and the plan is not frozen.

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