Materiality and Risk

Jamaica Jewels is a family-owned business that designs, manufactures and retails expensive jewellery. Inventory is held at the design warehouse and at their shops located in the countrys two major airports. Inventory is also sometimes sent to customers for approval, prior to a sale being made. Deloitte Ltd has been re-appointed as auditors for the year ended 31st December 2021.

Jamaica Jewels has had a difficult due to COVID-19 and the reduction in air travel. A recession has caused a fall in sales and the future is uncertain. A fourth shop was closed during the year and the premises are still up for sale. The Financial Director was dismissed half way through the year and is pursuing a claim for unfair dismissal. A replacement has not yet been found.

The Managing Director is due to retire next year and is likely to require loans he has made to the business to be repaid. Negotiations with the bank in respect of loans to cover these repayments have started.

Required

(a) Explain the importance of audit risk to an Auditor. Identify how materiality is linked to audit risk and the need for it to be considered in planning an audit. (10 marks)

(b) In the planning of the audit of Jamaica Jewels, identify the risks arising from the above scenario. Outline what will need to be taken into account, Explain the reasons for these risks to be taken into account. (10 marks)

(c) Explain the concepts of materiality and performance materiality in accordance with ISA 320 Materiality in Planning and Performing an Audit. (5 marks)