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

In reviewing the financial statements of Narmada Pharma Ltd, a practitioner determines materiality. The statements are general purpose, not prepared for any specific users. A lender has told the practitioner informally that it cares most about a small receivable classification. How should the practitioner approach materiality?

For general purpose statements, the practitioner ordinarily does not consider the effect of misstatements on specific users whose needs vary widely. Materiality is judged assuming users are reasonably knowledgeable, understand that statements are prepared and reviewed to materiality levels, and recognise estimation uncertainty.

  1. ASet materiality using the lender's information needs, as it is the most demanding user
  2. BOrdinarily not consider the possible effect of misstatements on specific users whose needs vary widely, and assume users are reasonably knowledgeable and understand materiality levels and estimation uncertaintyCorrect
  3. CAssume users have no knowledge of accounting and set materiality at zero
  4. DApply materiality only to disclosures and not to amounts

Explanation

The standard says that unless the engagement is for statements meeting particular needs of specific users, the effect of misstatements on specific users with widely varying needs is not ordinarily considered. It lets the practitioner assume users have reasonable business and accounting knowledge, understand materiality levels and recognise estimation uncertainty. Option A applies the specific-user view wrongly.

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