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

Rao & Associates are reviewing the financial statements of Sahyadri Pharma Ltd, a general-purpose set of statements for diverse users. The engagement partner proposes to fix materiality by weighing how misstatements would affect one particular lender's lending decision. Which view is correct under SRE 2400 (Revised)?

The proposal is incorrect. Unless the statements are meant for specific users' particular needs, the effect of misstatements on specific users whose needs vary widely is not ordinarily considered; the practitioner assumes users understand statements are reviewed to levels of materiality.

  1. ACorrect, as the effect on each specific user must always be considered
  2. BCorrect, since lenders are always the primary users of reviewed statements
  3. CIncorrect, because users are assumed to understand that statements are reviewed to levels of materiality, and the effect on specific users with widely varying needs is not ordinarily considered unless the statements serve specific users' particular needsCorrect
  4. DIncorrect, because materiality has no role in a review engagement

Explanation

The standard says materiality is a matter of professional judgment based on the needs of intended users as a group, and unless the statements are meant for specific users' particular needs, the possible effect on specific users is not ordinarily considered. Option D is wrong because materiality applies in reviews.

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