Question

a) Explain the materiality principle and its importance to the auditor.

b) Identify the four forms of audit opinion and the circumstances in which each is to be used, as set out in International Standards on Auditing.

Premium Precious Ltd buys, processes and resells gold, silver, platinum and other precious metals. The value of these can be as high as £50 per gram. The average value of all stock, including work in progress, is about £25m. Commodity prices change daily. There are separate stores for unprocessed and processed stock. Security systems are thought by management to be extremely tight and management tell you that a theft has never taken place. The new Chief Executive is not willing to give you direct access to the stock on the grounds of security.

The unaudited financial statements show an inventory figure of £23.815m and a net profit of £7.803m.

c) Prepare a letter to the Chief Executive explaining why you need direct access to the stock for the purposes of your audit of the financial statements and the potential consequences for the audit engagement if this is not provided.

Answer 1

1) Materiality is a concept which helps a company to disclose only the transactions which are relatively large which are concern for the person who is using financial statement of company . For eg a company having turnover of 1000 cr , transaction value of 100 is of no use to record separately.

The biggest importance of materiality is that it helps in reduction of volume of transaction and focussing more on transactions with high value. It saves time and energy of auditor. Moreover, quality can be obtained .

2) Four types

Unqualified Opinion - It is also known as clean report which is free form material misstatement

Qualified Opinion- When there is material misstatement present but not pervasive in nature

Adverse - Material misstatement and pervasive in nature

Disclaimer - When auditor is not able to form opinion due to absence of adequate financial records.