Auditing and Assurance: Materiality and Analytical Procedure

Running head: AUDITING AND ASSURANCE
Auditing and assurance
Name of the student
Name of the university
Student ID
Author note

1AUDITING AND ASSURANCE
Table of Contents
Case study – Cloud 9..................................................................................................................2
Part 1 – Materiality.................................................................................................................2
Part 2 – Analytical procedure.................................................................................................3
Research question.......................................................................................................................6
Introduction............................................................................................................................6
Discussion..............................................................................................................................6
Conclusion..............................................................................................................................9
Reference..................................................................................................................................10

2AUDITING AND ASSURANCE
Case study – Cloud 9
Part 1 – Materiality
Planning materiality (PM)
Planning materiality is considered as the amount of misstatement that is set by the
auditors at the stage of planning of the audit on the basis of materiality with regard to the
financial statements. PM is used by the auditor for assessing whether individually or in
aggregate with any other item the misstatement misstated the financial report materially.
Misstatements may mislead the users who make their decisions based on the misstated
financial statements. Once the materiality involved in financial report recognised by the
auditor, based on that the auditor set the tolerable misstatement or performance materiality
for the financial statements. However, the PM shall be higher as compared to the
performance materiality (Lakis and Masiulevičius 2017).
In the given scenario, Cloud 9 Pty Ltd is mainly engaged in whole selling of the
athletic shoes to the main customers Myer, David Jones, rebel Sports and Foot Locker. In the
year 2013 the company also started the online small supply channel for direct supplying to
the customers. W&S Partners, the Australian accounting firm that offers accounting and audit
related services has recently been appointed as the auditor of Cloud 9 Pty Ltd. The auditors
started planning for the audit of the company for considering materiality concept through
gaining an understanding of client’s business structure and environment (Swart 2018).
Various bases are used while establishing the materiality like 5% of profit, 0.5% of turnover,
2% of gross profit, 0.5% of total asset and 1% of equity. Generally, profit before tax is
considered while establishing the materiality base. However, if the company reported loss for
the year or if the profitability is significantly affected by any particular transaction or

3AUDITING AND ASSURANCE
adjustment, profit before tax cannot be used as the base for establishing materiality level. In
the given case of Cloud 9 Pty Ltd it is recognised that company’s profitability significantly
increased from the proceeds received from disposals amounting to 15,76,859 (Barndt, Fuller
and Flynn 2016). Hence, profit before tax cannot be considered for establishing materiality
base. Considering total asset for establishing the materiality base will be appropriate for
Cloud 9 Pty Ltd as the company is engaged in the business for athletic shoe and it is assumed
that significant amount of the company is involved in inventories, cash, trade receivables and
plant – equipment. As per the given information amount if total asset for the company for the
year 2016 was 328,64,958. Hence, the materiality based on total asset will be 0.5% on total
asset that is 164,324.79 (Audsabumrungrat, Pornupatham and Tan 2015).
Part 2 – Analytical procedure
(a) Analysis of business risks for Cloud 9 Pty Ltd
It is compulsory for the auditor to perform the risk assessment for identification and
assessment of the risks of the risk involved with material misstatement related to the financial
report at the level of assertion and procedure for risk assessment through analytical
procedure. Analytical procedure for Cloud 9 Pty Ltd will be carried out through ratio analysis
(Amiram et al. 2017)