Question 6 (20 marks)

The following questions deal with the topics of materiality and risks.

(a) Assume the clients are of the same size and the same materiality is used for each, state whether each of the following statements is true or false. Justify your answers.

(i) The audit evidence accumulated for every client should be approximately the same, regardless of the circumstances.

(ii) If the audit evidence accumulated for two different clients is approximately the same, achieved audit risk is approximately the same.

(iii) If desired audit risk is the same for two different clients, the audit evidence for the two clients should be approximately the same.

(iv) If desired audit risk, inherent risk, and control risk are approximately the same for two different clients, the audit evidence for the two clients should be approximately the same.

(v) A CPA firm should decrease acceptable audit risk for audit clients when external users rely heavily on the statements.

(b) You are evaluating audit results for current assets in the audit of Speedy Plumbing Ltd. You set the materiality for current assets at $50,000 for overstatements and at $80,000 for understatements.

Required: (i) Explain why you may have set a lower preliminary judgement about materiality for overstatements than understatements in this situation.

(ii) Explain why materiality is important but difficult to apply in practice.