Determining Planning Materiality for Audit

This document explains the concept of planning materiality in audit and how it is calculated. It discusses the factors used to determine planning materiality, such as sales revenue, total assets, gross profit, shareholders equity, and net profit. The document also highlights the importance of planning materiality in assessing the materiality of financial results.

PROJECT

TASK 1
Determining the planning materiality for the audit
The planning materiality mainly accounts for the misstatement amount which is being set by
the auditors in their planning stage of the audit which is determined from the financial
statement. There are certain quantitative factors which is used for determining planning
material which are given below:
 0.5% to 1% of Sales Revenue
 1% to 2% of Total Assets
 1% to 2% of Gross profit
 2% to 5% of Shareholders Equity
 5% to 10% of Net Profit
As per the financial statements extracted of M&S, total revenue amount to £10,181.9 million.
Based upon the possible risk expected is 0.8% of the total sales revenue is considered as
materiality. Thus, the computed planning materiality is £81.45 million (Annual Report &
Financial Statement. 2020). Therefore, this is the planning materiality amount which is being
used for assessing the materiality of the financial results by the auditor.
Reason for calculating materiality
As per IAS 320, the planning materiality is calculated for determining the aggregate value of
all the identified and unidentified misstatements which an auditor can tolerate without
impacting opinion pertaining to audit. This is the reason why planning materiality is
determined.
TASK 2
Calculate the sample size for the statement of financial position
Sample size is a concept which helps in defining the number of observations which is to be
considered within a statistical sample (Appelbaum, Kogan and Vasarhelyi, 2017). Pertaining
to M&S unlimited population is expected. Formula for determining, sample size (n) is:
In this, Z = z score,
ε is the margin of error,

N = population size,
p̂ = population proportion
n = 1.96^2 * 0.5(1-0.5) / 0.05^2 = 385
n’ = 385 / (1+(1.96^2 * 0.5(1-0.5) / 0.05^2 *200)) = 132
Therefore, a sample size of at least 132 items would be required to have a higher confidence
level of 95%.
Tolerable error = 75% of £81.45 = £61.08.
Expected error is 5% of tolerable error = 5% of £61.08 = £3.05
Audit programme
Assertion/potential
error
What evidence will
be collected and
how?
What is the
direction of the
test?
Critically evaluate
the evidence for
each test?
Occurrence
(Salaries and
wages)
Salaries and wages
expense being
incurred during the
period. It does not
involve any payroll
cost of any
unauthorized
personnel.
This test will help in
determining the truth
behind the amount
paid as salary or
wages. It will
involve supporting
documents or
records.
Each and every pay
slip will eb analyzed
with the name of
workers to whom it
is provided.
Completeness
(Selling and
administrative
expenses)
Receipts pertaining
to expenses incurred
will be gathered as
evidence.
This test will help
providing direction
whether transaction
is right or wrong
(Appelbaum, Kogan
and Vasarhelyi,
2018).
After gathering the
evidence, proper
evaluation of it will
be done for
undertaking better
decisions.
Accuracy
(Employee costs)
Proof will be
gathered like pay
slip which will help
in determining the
amount of pertaining
to the employee
costs.
This will result into
collecting right set
of information and
leads towards the
right direction
involved in
determining the
employee costs.
There is an
additional amount
recorded in cost of
sales which are
included within the
aggregate
remuneration
Cut-off (Repairs
and renewal)
The evidence will be
gathering in regard
to receipt pertaining
to the payment made
in respect to repair
and maintenance.
It will involve taking
a look from the
general ledger to the
supporting
documents along
with the recording in
order make sure
everything is
correctly recorded.
After gathering the
evidence, proper and
effective evaluation
of the same will be
carried out which
will assist in
determining the true
and fairness of the
evidence and the
amount.

Classification
(Finance costs)
Under this, proper
supporting
documents will be
collected in regard to
the various finance
cost incurred by the
organization.
This will help
determining that the
transactions have
been classified and
presented fairly
within the financial
statements.
The critical
evaluation of each
evidence will help in
determining the
financial cost as
been covered under
the heading finance
cost and is not
included into other
heads of expenses
and costs.
TASK 3
Perform Substantive Analytical Review
As per IAS 520, the four steps will be undertaken in order to perform the substantive
analytical review which are intrinsic within the process of the substantive analytical review.
Step 1: Developing an independent expectation
Under this, proper and precise objective is set which helps in meeting with the
objective and using analytical procedures. Under this, plausible relationship is formed among
the various possible errors or assertions which are likely to remain on the basis of the
business or the business trends.
Step 2: Identifying a significant difference
In this auditor will set the expected amount of difference which will be acceptable
without any requirement of additional investigation and therefore, this difference is called as
the threshold. In respect to each of the assertions, the auditor of the company will identify the
potential level of acceptable misstatement and it should not surpass the planning materiality
and should be significantly small which helps in identifying material misstatement (Harper
and Dunn, 2018).
Step 3: Computing difference
In this based upon the amount reported and evidence received in respect to it, auditor
of M&S made a comparison of it through which significant amount of difference if any is
determined. It involved certain mathematical calculations. In the context of this, auditor has
to look into the employee costs pertaining the recording of it in the appropriate head.
Step 4: Investigating the differences and drawing conclusions
The auditor will further dig into the significant difference or the errors which are
found to be very suspicious. The employee cost is main potential error which has drawn eth
attention of auditor as it has increased likelihood of misstatements. Therefore, the auditor is

required to take prompt action and identify the any other such factors which were previous
overlooked. This will help in determining the exact level of material misstatement in respect
to it so that actions can be undertaken after considering all the related factors or elements.

APPENDIX

REFERENCES
Books and Journals
Appelbaum, D. A., Kogan, A. and Vasarhelyi, M. A., 2018. Analytical procedures in external
auditing: A comprehensive literature survey and framework for external audit
analytics. Journal of Accounting Literature. 40. pp.83-101.
Appelbaum, D., Kogan, A. and Vasarhelyi, M. A., 2017. Big Data and analytics in the
modern audit engagement: Research needs. Auditing: A Journal of Practice &
Theory. 36(4). pp.1-27.
Harper, C. and Dunn, C., 2018. Building better accounting curricula. Strategic
Finance. 100(2). pp.46-54.
Online
Annual Report & Financial Statement. 2020. [Online]. Available Through:<
https://corporate.marksandspencer.com/documents/msar2020/m-and-
s_ar20_full_200528.pdf>.