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ACCA Strategic Professional · Advanced Audit and Assurance (International) · Planning, materiality and assessing the risk of material misstatement

When determining materiality for a not-for-profit charity, Mercy Trust, audited by Clarke & Partners, which benchmark would normally be most appropriate under ISA 320 guidance?

Total expenditure or total revenue would normally be used, because users of a not-for-profit charity's statements focus on income and spending rather than profit. Profit before tax is not meaningful for such an entity, and audit fees are not a valid benchmark.

  1. AProfit before tax, as for a listed company
  2. BTotal expenditure or total revenue (income), because the charity is not profit-orientedCorrect
  3. CThe partners' fee for the audit
  4. DNumber of beneficiaries served

Explanation

ISA 320 says the benchmark should reflect what users focus on. For not-for-profit entities, profit is not a meaningful measure, so total expenditure or total revenue is typically used. Audit fees and beneficiary numbers are not financial statement benchmarks.

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