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CA Final · Advanced Auditing, Assurance and Professional Ethics · Review of Financial Information

Gupta & Co is reviewing the financial statements of Ganga Pharma Ltd, which are prepared for general use. A partner proposes lowering materiality because one particular lender may be very sensitive to a classification misstatement. Which view reflects SRE 2400 (Revised)?

Materiality is the practitioner's professional judgment, and for general-purpose statements the possible effect of misstatements on specific users with varying needs is not ordinarily considered. It is considered only if the statements are meant for the particular needs of specific users, so the lender's sensitivity alone does not justify lowering it.

  1. AMateriality must always reflect the needs of the most sensitive user
  2. BUnless the statements are intended to meet the particular needs of specific users, the possible effect of misstatements on specific users, whose needs may vary widely, is not ordinarily consideredCorrect
  3. CMateriality is a matter of management's judgment, not the practitioner's
  4. DUsers are assumed to have no knowledge of accounting, so materiality must be set very low

Explanation

The text says materiality is a professional judgment affected by the perception of intended users' needs. Unless the statements serve specific users' particular needs, the effect of misstatements on specific users is not ordinarily considered. The standard also assumes users have reasonable knowledge of business and accounting, so the last option is wrong.

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