Cloud 9 Ltd. Case Book Assignment 2.1 a (Essay) Planning materiality W&S Partner

Question

Cloud 9 Ltd. Case Book Assignment 2.1 a (Essay)

Planning materiality

W&S Partners’ audit methodology dictates that one planning materiality (PM) amount is to be used for the financial statements as a whole. Further, only one basis should be selected—a blended approach or average should not be used. The basis selected is the one determined to be the key driver of the business.

W&S Partners uses the following percentages as starting points for the various bases. These starting points can be increased or decreased by taking into account qualitative client factors, which could be:

? the nature of the client’s business and industry (such as rapid change, either through growth or downsizing, or unstable environment) ? the fact that it is a publicly listed entity (or subsidiary of) subject to regulations ? the knowledge of or high risk of fraud.

Explanation / Answer

The basis to be selected in this audit should be Profit before Tax and Revenues. As the organization has taken a loan from the bank, so the bank would be interested in the profit making capacity and consistency of profits and for more profit, there should be more revenues and the management is also interested in the revenues amount.

Planning Materiality is the amount of transactions which the auditor will audit and check whether the involved transactions shows true and fair view of the financial statements. Materiality depends on various factors such as Auditor’s Experience in previous audits, internal control of the organization, etc.

If the auditor observes that the internal control is not up to mark or some other factors like management interferences in day to day working, etc., then the auditor will decrease the materiality limit so that transactions involving lower amount will also be covered in the audit, so that more transactions can be checked. If the auditor observes that everything is going good in the organization, then they may increase the materiality limit.

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