Page 80 - CA Inter Audit PARAM

CA Ravi Taori
OR
Determining materiality involves the exercise of professional judgment. A percentage is often applied to a
chosen benchmark as a starting point in determining materiality for the financial statements as a whole.
Discuss stating the factors that may affect the identification of an appropriate benchmark.
OR
Calen Retail Ltd. is preparing its annual financial statements, and the auditors are tasked with determining
materiality. The company has used revenue as the benchmark, as it is a key indicator of performance.
However, Calen Retail has recently opened new stores and closed underperforming ones, which could
significantly affect both revenue and profitability. As per given case, what factors should the auditors
consider when selecting the most appropriate benchmark for materiality?
Answer ➢ Factors for deciding Benchmark: (A-pple LOVE)

Factors that may affect the identification of an appropriate benchmark include the following:
E - The elements of the financial statements (for example, assets, liabilities, equity, revenue,
expenses);
A - Whether there are items on which the attention of the users of the 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);
L - 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;
O -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
V -The relative volatility of the benchmark.

➢ Examples of benchmarks:
Examples of benchmarks that may be appropriate, depending on the circumstances of the entity,
include categories of reported income such as profit before tax, total revenue, gross profit and total
expenses, total equity or net asset value. Profit before tax from continuing operations is often used
for profit-oriented entities. When profit before tax from continuing operations is volatile, other
benchmarks may be more appropriate, such as gross profit or total revenues.

Author’s Note:

Decide Benchmark (Base)
Apple LOVE
A- Attention of the users (E.g., PVT Sector-Profit/PSUs -Turnover/Charity- Corpus)

L- Life Cycle & Industry & Economic Environment (E.g., Flipkart Vs Reliance)

O- Ownership Structure & Financing (E.g., Big Vs Small Shareholder / Debt Vs Equity)

V- Volatility
(E.g., Volatility may lead to big changes in materiality & all audit procedures, hence less volatile is more
preferred)

E- Elements of Financial Statements

Materiality at financial statement level vs materiality Old Course--(SM20/SM21)
QNO at TBD level
320.04
Bhaskar CNO SA320.060
Whether misstatements of lesser amounts than 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? Explain with examples
➢ Factors that may indicate the existence of one or more particular classes of transactions, account
balances or disclosures for which misstatements of lesser amounts than materiality for the financial

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