Anaba Sampson is an audit assistant of Global Accountants, a firm of Chartered Accountants. During the audit of a client’s account, for the year ended 31 December 2011, Anaba Sampson detected an error amounting to Ten Ghana Cedis (GH¢10.00) in respect to each interest payment which recurred a number of times. The Chief Accountant of the client advised Anaba not to request for passing any adjustment entry as individually the errors were insignificant. The company had 3000 deposit accounts and interest was paid half yearly.
Required:
i) Describe FOUR factors affecting judgment about materiality. (4 marks)
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- Relative concept as it depends on the size and nature of the item, judged in particular circumstances of its misstatements.
- Can be judged from the impact of the item at the overall financial statement level and/or at the individual account balance or class of transactions.
- Influenced by legal and regulatory requirements and
- Cumulative effect of small amounts may be material.
ii) Discuss the advice of the Chief Accountant. (11 marks)
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Materiality has been defined by the standard, ‘Audit Materiality’ as an information whose misstatement could influence the economic decisions of the users taken on the basis of financial information. (2 marks)
In the situation given, the error, apparently, seems to be of small amount (GH¢10.00) and General Manager (Finance) is of the opinion it I, hence, not material and thus there is no need to pass any adjustment entry. The audit assistant should not accept the argument of the General Manager because there are 3000 deposit accounts and interest payment is quarterly. If the cumulative effect of these small amounts is considered, as per the requirement of the standard, error of GH¢10.00 which has recurred a number of times, may become material. (7 marks)
If considered “immaterial” it may cause an overstatement of income. Hence, the auditor should apply expanded substantive procedures to assess the cumulative effect of these small amounts. (2 marks)