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Medium2 marksMultiple Choice
Planning and Risk AssessmentMaterialityAudit PlanningISA 320

ACCA · Question 10 · Planning and Risk Assessment

CASE SCENARIO: AgriGrow Tech Ltd
AgriGrow Tech Ltd is an agricultural technology startup developing drone-based crop monitoring systems. You are planning the audit for the year ended 30 September 20X6. AgriGrow has capitalized significant Research & Development (R&D) costs this year related to a new AI-driven drone model. They also received a substantial government grant conditional on creating jobs in rural areas. Due to rapid growth, AgriGrow recently established an internal audit department, which has spent the last three months reviewing the company's payroll controls.

QUESTION:
During the audit, it is discovered that AgriGrow failed to meet the job creation conditions of the government grant, meaning the grant may have to be repaid. How should this discovery impact your assessment of materiality?

Answer options:

A.

Materiality should remain unchanged as it is set permanently at the planning stage.

B.

Materiality should be revised upwards to accommodate the potential liability.

C.

Materiality may need to be revised downwards due to the increased risk and potential impact on the financial statements.

D.

Performance materiality should be ignored, and only overall materiality should be updated.

How to approach this question

Understand that materiality is dynamic. If new information indicates higher risk or lower profitability (due to a liability), materiality thresholds should be lowered to increase audit scrutiny.

Full Answer

C.Materiality may need to be revised downwards due to the increased risk and potential impact on the financial statements.✓ Correct
ISA 320 requires the auditor to revise materiality for the financial statements as a whole (and, if applicable, the materiality level or levels for particular classes of transactions, account balances or disclosures) in the event of becoming aware of information during the audit that would have caused the auditor to have determined a different amount initially. A potential large liability increases risk, usually resulting in a downward revision of materiality to increase the extent of audit testing.

Common mistakes

Thinking materiality is a static figure set only once during planning.
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