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CMA Intermediate · Corporate Accounting and Auditing · Nature, Scope, Objectives and Significance of Auditing

During the audit of Kaveri Foods Ltd., profit before tax is Rs 8,00,000. The auditor sets overall materiality at 5% of profit before tax and performance materiality at 75% of overall materiality. An uncorrected misstatement of Rs 25,000 overstating expenses is found. Which conclusion is correct?

Overall materiality is Rs 40,000 and performance materiality is Rs 30,000. The Rs 25,000 misstatement is below both thresholds, so it is not individually material, but the auditor must still accumulate it with other misstatements and evaluate the aggregate effect on the financial statements.

  1. APerformance materiality is Rs 30,000, so the misstatement exceeds it
  2. BOverall materiality is Rs 40,000 and the misstatement is below it, so it is individually immaterial but must still be accumulated and evaluatedCorrect
  3. COverall materiality is Rs 60,000, so the misstatement can be ignored
  4. DOverall materiality is Rs 40,000 and the misstatement is material because it exceeds performance materiality

Explanation

Overall materiality = 5% x 8,00,000 = Rs 40,000. Performance materiality = 75% x 40,000 = Rs 30,000. The Rs 25,000 misstatement is below both, so it is not individually material, but misstatements must be accumulated and evaluated in aggregate with others. Option A wrongly says 25,000 exceeds 30,000; option D has the same flaw.

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