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ACCA Strategic Professional · Advanced Audit and Assurance (International) · Audit procedures and obtaining evidence

Vantage Plc has revenue of $80m, and the auditor set performance materiality at $0.8m. For a substantive analytical procedure on distribution costs, the auditor developed an expectation of $4.0m and set the amount of difference acceptable without further investigation. Recorded distribution costs are $4.9m. Which is the most appropriate approach?

The acceptable difference must be set so that aggregated misstatements do not exceed materiality, typically at or below performance materiality. Here $0.9m exceeds the $0.8m performance materiality, so it needs investigation. Comparing it with revenue uses the wrong base.

  1. ASet the acceptable difference at an amount that, when aggregated with other misstatements, does not risk exceeding materiality, so a $0.9m difference above this threshold requires investigationCorrect
  2. BAccept the $0.9m difference because it is only about 1% of revenue
  3. CSet the acceptable difference at overall materiality, since the procedure is substantive and not a risk assessment procedure
  4. DDisregard the threshold and instead extrapolate the $0.9m to the whole population of costs

Explanation

ISA 520 requires the auditor to determine the amount of difference from expected values that is acceptable without further investigation, taking into account materiality and the desired assurance, so aggregated differences do not exceed materiality. A $0.9m difference exceeds performance materiality of $0.8m, so investigation is needed. Comparing to revenue is the wrong base.

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