Question

Cloud 9 - Continuing Case W&S Partners has just won the January 31, 2023, audit for Cloud 9. The audit team assigned to this client is: • Partner, Jo Wadley • Audit manager, Sharon Gallagher • Audit senior, Josh Thomas • IT audit manager, Mark Batten • Experienced staff, Suzie Pickering • First-year staff, Ian Harper As a part of the risk assessment phase for the new audit, the audit team needs to gain an understanding of Cloud 9's structure and its business environment, determine materiality, and assess the risk of material misstatement. This will assist the team in de- veloping an audit strategy and designing the nature, extent, and timing of audit procedures. One task during the planning phase is to consider the con- cept of materiality as it applies to the client. Auditors will de- sign procedures to identify and correct errors or irregularities that would have a material effect on the financial statements and affect the decision-making of the users of the financial statements, Materiality is used in determining audit procedures and sample selections, and evaluating differences from client records to audit results. Materiality is the maximum amount of misstatement, individually or in aggregate, that can be accepted in the financial statements. In selecting the benchmark to be used to calculate materiality, the auditors should consider the key drivers of the business. They should ask, "What are the end users (that is, stockholders, banks, etc.) of the accounts going to be looking at?" For example, will stockholders be interested in profit figures that can be used to pay dividends and increase share price? W&S Partners' audit methodology dictates that one plan- ning materiality (PM) amount is to be used for the financial statements as a whole. The benchmark selected for determin- ing materiality is the one determined to be the key driver of the business. W&S Partners use the following percentages as starting points for the various benchmarks: Benchmark Threshold (%) Income before tax 5.0 Total revenue 0.5 Gross profit 2.0 Total assets Equity 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 (for example, rapidly changing, either through growth or downsizing, or an unstable environment). . Whether the client is a public company (or subsidiary of) subject to regulations. • The knowledge of or high risk of fraud. Typically, income before tax is used; however, it cannot be used if reporting a loss for the year or if profitability is not consistent. When calculating PM based on interim figures, it may be nec- essary to annualize the results. This allows the auditors to plan the audit properly based on an approximate projected year-end balance. Then, at year-end, the figure is adjusted, if necessary, to reflect the actual results. Required Answer the following questions based on the information pre sented for Cloud 9 in the appendix to this text and in the current chapter and previous chapters. a. Using the October 31, 2022, trial balance in the appendix to this text), calculate planning materiality and include the justification for the benchmark that you have used for your calculation. b. Discuss how the planning materiality would be used to deter- mine performance materiality. c. If the planning materiality amount is subsequently increased or decreased later in the audit, how would that impact the audit?

Answer 1

Cloud 9 - Financial Position
Income Statement
As on 31st oct 2022
	Amount ($)	Amount ($)
Revenue		27,73,38,461
Cost of sales	16,93,46,154
Selling and Adim Expenses	7,90,92,308
Interest Expenses	14,38,461
Other Expenses	4,53,846
Total cost		25,03,30,769
Profit before Tax		2,70,07,692.00
Less Income Tax		95,11,538.00
Net Profit		1,74,96,154.00

Audit Materiality – The concept of materiality is adopted by Auditor both in planning and performing the audit . Auditor follow this materiality concept in relates to the importance of transaction , find out any discrepancy. The auditor used to follow materiality because at final stage they have to express opinion whether the financial statement are prepared in all material respects .In Financial sector , error leads to take wrong or incorrect decision. Normally auditor consider size of the company’s revenue and expenses for judgement matter of materiality

As per ISA 200, the purpose of the audit is to enhance the degree of confidence of intended users in the financial statement .

Auditor do planning and performing materiality to evaluate the effect of identified misstatement of the audit and of uncorrected misstatement if any

  Normally Auditor used to cover Pre tax Income ( basis of certain % ) while determining material amount or certain % of revenue ..

As per Question , Auditor could have taken Income before tax ( threshold % 5%) + 0.5% as base in case of Revenue .,

As per latest financial data , cloud 9 us making good amount of Revenue as well as Profit .

Performance Materiality – The amount set by the auditor at less than materiality for the financial statement as a whole 9 as discussed above) . Auditor selected materiality as a whole to reduce to an appropriately low level the probability. Performance materiality also refers to the amount set by auditor at less than materiality level relates to class of transactions , account balance

Auditor while doing audit can change materiality amount after analysis it on regular interval and involvement of management .

Auditor can derived Lower materiality at initial days of Audit as a whole . During audit time auditor should determine whether it is necessary to revise performance materiality and the nature, timing and extent of the further audit procedures remain appropriate

Auditor do materiality and obtain reasonable evidence to reduce audit risk to an acceptable low level.

Audit risk and materiality are well connected , Auditor do risk analysis of any material misstatement in financial and detect the risk . Materiality and Audit risks are considered throughout the audit.