Question

In the audit of accounts receivable at XYZ company (the client), the gross amount (i.e. not including Allowance for doubtful debt) presented on the financial statement is $700,000 which includes customer A ($300,000) and company B ($400,000). The balance of Allowance for doubtful debt account is zero. You are the auditor and you are asked to check the accounts receivable account.

Required: . What would you do if the client admitted the two errors in b) and c) but did not want to adjust the financial statements while your audit manager has set the materiality for AR account as 450,000?

Answer 1

The materiality level may be set by the auditor for indivisual assertions as well as for the financial statements as a whole. In the given situation the materiality level set by the auditor is 4,50,000 and the indivisual error anounts to 4,00,000 and 3,00,000. These misstatements may not be misstated at the indivisual leve but are above the materiality level when combined therefore the auditor consideringg the materiality level must ast the client to adjust the financial misstatement . If the client refuses to do so the report must be qualified.