AUE2601 Assignment 3 Semester 1
2025
Question 1: Risks of Material Misstatement at the Overall Financial Statement
Level
The risks of material misstatement (RMM) at the overall financial statement level for
Furniture Business for the year ended 31 December 2024 can be described as follows:
1. Performance Bonus Structure: The bonus for the directors is linked to an increase in
net profit, which could encourage management to manipulate financial statements to
, meet the required 5% increase in profit. This creates a risk of intentional misstatement
in the financial statements to achieve this target.
2. Early Release of Financial Statements: The acceleration of the financial statement
release could put pressure on the audit and accounting staff, potentially leading to
hurried or incomplete procedures. This might result in unintentional errors or
omissions in the financial statements.
3. Decline in Payroll Expenses: The noticeable decline in payroll expenses due to store
closures and retrenchments could lead to incomplete or inaccurate reporting of
liabilities, such as severance payments, or a misstatement of the employee benefit
expense. This raises the risk of understatement in financial reporting.
These factors indicate that the overall financial statement could be affected by management
bias or oversight, and such risks should be considered during the audit.
Question 2.1: Purpose of Planning Materiality and Performance Materiality
Planning Materiality and Performance Materiality are key concepts in auditing, and both
have specific uses during an audit:
• Planning Materiality: This is the threshold used to assess whether misstatements,
individually or in the aggregate, could influence the decisions of users of the financial
statements. The audit partner has requested this amount to assess whether the overall
financial statement is free from material misstatements that could affect the user’s
decisions.
• Performance Materiality: Set as a percentage of the planning materiality, this
represents the amount below which individual misstatements are not considered
material. It is used to guide the audit team in determining the level of testing needed
to detect misstatements that could aggregate to material levels.
Both amounts are used to establish the scope of the audit procedures and determine where
significant attention should be placed during testing to ensure that the audit is thorough and
focused on potential areas of risk.
Question 2.2: Evaluation of 1% of Revenue as the Benchmark for Materiality
Using 1% of revenue as a benchmark for calculating materiality is a commonly accepted
approach. However, it has both advantages and limitations:
• Advantages:
o Revenue is a stable and easily measurable figure: It provides a clear and
quantifiable basis for calculating materiality.
o Consistency: Using the same benchmark as the previous year ensures
comparability and consistency in the audit process.
• Limitations:
o Revenue may not always correlate with profitability: Revenue can increase
due to various reasons, such as price increases or growth in volume, but it may
2025
Question 1: Risks of Material Misstatement at the Overall Financial Statement
Level
The risks of material misstatement (RMM) at the overall financial statement level for
Furniture Business for the year ended 31 December 2024 can be described as follows:
1. Performance Bonus Structure: The bonus for the directors is linked to an increase in
net profit, which could encourage management to manipulate financial statements to
, meet the required 5% increase in profit. This creates a risk of intentional misstatement
in the financial statements to achieve this target.
2. Early Release of Financial Statements: The acceleration of the financial statement
release could put pressure on the audit and accounting staff, potentially leading to
hurried or incomplete procedures. This might result in unintentional errors or
omissions in the financial statements.
3. Decline in Payroll Expenses: The noticeable decline in payroll expenses due to store
closures and retrenchments could lead to incomplete or inaccurate reporting of
liabilities, such as severance payments, or a misstatement of the employee benefit
expense. This raises the risk of understatement in financial reporting.
These factors indicate that the overall financial statement could be affected by management
bias or oversight, and such risks should be considered during the audit.
Question 2.1: Purpose of Planning Materiality and Performance Materiality
Planning Materiality and Performance Materiality are key concepts in auditing, and both
have specific uses during an audit:
• Planning Materiality: This is the threshold used to assess whether misstatements,
individually or in the aggregate, could influence the decisions of users of the financial
statements. The audit partner has requested this amount to assess whether the overall
financial statement is free from material misstatements that could affect the user’s
decisions.
• Performance Materiality: Set as a percentage of the planning materiality, this
represents the amount below which individual misstatements are not considered
material. It is used to guide the audit team in determining the level of testing needed
to detect misstatements that could aggregate to material levels.
Both amounts are used to establish the scope of the audit procedures and determine where
significant attention should be placed during testing to ensure that the audit is thorough and
focused on potential areas of risk.
Question 2.2: Evaluation of 1% of Revenue as the Benchmark for Materiality
Using 1% of revenue as a benchmark for calculating materiality is a commonly accepted
approach. However, it has both advantages and limitations:
• Advantages:
o Revenue is a stable and easily measurable figure: It provides a clear and
quantifiable basis for calculating materiality.
o Consistency: Using the same benchmark as the previous year ensures
comparability and consistency in the audit process.
• Limitations:
o Revenue may not always correlate with profitability: Revenue can increase
due to various reasons, such as price increases or growth in volume, but it may
