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

In reviewing the financial statements of Ganga Pharma Ltd, the reviewer set materiality early in the engagement. Midway, the reviewer learns that a major bank covenant based on profit would have led to a lower materiality figure had it been known at the outset. What does SRE 2400 (Revised) require?

The practitioner shall revise materiality for the financial statements as a whole when becoming aware during the review of information that would have caused a different amount to be determined initially. Materiality is the practitioner's professional judgment, so the original figure is not retained and management does not set it.

  1. ARetain the original materiality, since changing it after planning is not permitted
  2. BRevise materiality only if the engagement is converted to an audit
  3. CRevise materiality for the financial statements as a whole, since information became known that would have caused a different amount to be determined initiallyCorrect
  4. DAsk the management to decide the revised materiality figure

Explanation

The standard says the practitioner shall revise materiality for the financial statements as a whole on becoming aware of information during the review that would have caused a different amount to be determined initially. Retaining the figure contradicts this, and materiality is a matter of the practitioner's professional judgment, not management's.

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