Audit & Assurance
Question
Described below are three situations which have arisen at three unrelated external audit clients of your firm which the audit partner has asked you to review.
1. Silvan Ltd (‘Silvan’)
The financial statements of Silvan show the purchase of a motor vehicle from Endeavour Ltd (Endeavour), for £16,500, which has been appropriately included in non-current assets. While reviewing Silvan’s board minutes you discovered that Endeavour is owned and managed by the husband of Silvan’s managing director. The directors of Silvan refuse to disclose the transaction in the notes to the financial statements as they claim that the amount is too small to warrant disclosure. The draft financial statements of Silvan show total assets of £7.5 million.
Question continued overleaf ………..
Question
2.Plantoquip Plc (‘Plantoquip’)
Plantoquip’s audit documentation in relation to ‘plant and equipment’ notes an error in the calculation of depreciation on some items in the sample tested. The audit junior who performed the test extrapolated the error across the population of plant and equipment. This resulted in an overall expected error of £56,555. Materiality for the audit was set at £85,000. The audit junior concluded the error was not material.
3.May Plc (‘May’)
Your firm attended the inventory count at May’s warehouse on 30 June 2020, but was unaware that May also owned inventory held at a third party’s premises on this date. May has not retained any count records in respect of the inventory held by the third party and there are no other records from which the amount of inventory can be substantiated. The directors wish to include the inventory held at the third party’s premises in the year-end financial statements at £105,000.
The total assets of May at 30 June 2020 are £4.2 million and the profit before tax for the year ended 30 June 2020 is £950,000.
Required:
(a) Write a memo to the engagement partner in relation to each situation described above, explain your decisions as an auditor in light of materiality and the appropriate accounting principles. (You can develop the scenarios further as appropriate to illustrate the points made) (12 marks)
(b) Explain using suitable and relevant examples TWO reasons why performance materiality is set by auditors. (4 marks)
(c) Describe the relationship between materiality and audit risk within the external audit process. (4 marks)
