Additional Information

Materiality $-$ Determining overall materiality

Profit before tax

Users of the financial statements of profit$-$oriented entities are generally concerned with reported earnings at the pre$-$tax levels. When pre$-$tax profit fluctuates significantly from one year to another or the entity is making losses, it is useful to consider materiality relating to $$normalised$$ pre$-$tax profit or to consider an alternative benchmark. Acceptable range is $35\%.$

Revenue from operations

In the case where profit before tax is volatile or losses are being made, revenue may be considered an acceptable benchmark. However, where revenue is also volatile, it may be appropriate to consider an alternative benchmark. Acceptable range is $13\%.$

Total assets

Where an entity's activities ultimately stem from the assets held, or the users have a vested interest in the performance of the underlying assets, total assets may be a more appropriate basis for determining overall materiality. Acceptable range is $12\%$

Net assets

If pre$-$tax profit is relatively unstable and the company is in a start$-$up phase, and if the users are concerned with some indicator of changes in shareholders' equity, net assets may be an appropriate benchmark. Acceptable range is $24\%.$

The lower end of the respective ranges should be used where there is one or more of the following:

$$ A heightened public interest in the financial report.

$$ Inherent complexities and a history of misstatements in engagements.

Determining specific materiality

An entity may have financial statement areas where misstatements of lesser amounts than materiality for the financial statements as a whole could reasonably be expected to influence the economic decisions of financial statement users. In these cases, we will also determine the specific materiality levels to be applied to those areas. In considering whether to apply specific materiality levels to particular financial statement areas, we may find it useful to obtain an understanding of the views and expectations of those charged with governance and management.

Specific materiality will be calculated as $0\mathrm{.}5\%$ of this account balance or class of transactions.

Questions

$1.$ Calculate the overall materiality for the engagement. Justify your response.

$2.$ Calculate a specific materiality for one account that requires a lower level of materiality. Justify your response.