Page 109 - CA Final PARAM Digital Book.

Factors that may affect the identification of an appropriate benchmark include the following:
• The elements of the financial statements (for example, assets, liabilities, equity, revenue, expenses);
• Whether there are items on which the attention of the users of the particular entity’s financial
statements tends to be focused (for example, for the purpose of evaluating financial performance
users may tend to focus on profit, revenue or net assets);
• The nature of the entity, where the entity is at in its life cycle, and the industry and economic
environment in which the entity operates;
• The entity’s ownership structure and the way it is financed (for example, if an entity is financed
solely by debt rather than equity, users may put more emphasis on assets, and claims on them, than
on the entity’s earnings); and
• The relative volatility of the benchmark.

Determining a percentage to be applied to a chosen benchmark involves the exercise of professional
judgment. There is a relationship between the percentage and the chosen benchmark, such that a
percentage applied to profit before tax from continuing operations will normally be higher than a percentage
applied to total revenue.

In case if ABC Limited is engaged in manufacture and sale of air conditioner, and is having regular profits:
CA. B, the auditor may consider profit before tax /Earnings.
In case if ABC Limited is engaged in the construction of large infrastructure projects and incurred losses in
the previous two financial years, due to pandemic: CA. B, the auditor may consider Revenue or Gross Profit
as benchmarking. Alternatively, CA B, the auditor may consider the criteria relevant for audit of the entities
doing public utility programs/ projects, Total cost or net cost (expenses less revenues or expenditure less
receipts) may be appropriate benchmarks for that particular program/project activity. Where an entity has
custody of the assets, assets may be an appropriate benchmark.

QNO Revision of Materiality Old Course – (N09R, M15E, N16M, SM17, PM17, N17R, M18E,
43.000 TITANIUM CNO—SA320.100 M19M, SM20, SM21)

As an auditor of BRK Ltd Mr Preet applied the concept of materiality for the financial statements as a
whole on the basis of obtaining additional information of significant contractual arrangements that draw
attention to a particular aspect of a company's business, he wants to re-evaluate the materiality
concept Please guide him.
OR
“Auditor’s assessment of materiality may be different at the time of planning the engagement than
at the time of evaluating the results of his audit procedures” Discuss.

Answer Re-evaluation of the Materiality Concept: In the instant case, Mr. P, as an auditor of RST Ltd. has applied the
concept of materiality for the financial statements as a whole. But he wants to re-evaluate the materiality

concept on the basis of additional information of significant contractual arrangements which draws attention
to a particular aspect of the company’s business.

As per SA 320 “Materiality in Planning and Performing an Audit”, while establishing the overall audit strategy,
the auditor shall determine materiality for the financial statement as a whole. He should set the benchmark
on the basis of which he performs his audit procedure. If, in the specific circumstances of the entity, there is
one or more particular classes of transactions, account balances or disclosures for which misstatements of
lesser amounts than the materiality for the financial statements as a whole could reasonably be expected to
influence the economic decisions of users taken on the basis of the financial statements, the auditor shall
also determine the materiality level or levels to be applied to those particular classes of transactions, account
balances or disclosures.

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