1. Padma Textiles Ltd reports draft profit before tax of CU 4.2 million, which includes a one-off gain of CU 1.2 million on the sale of a surplus factory site. Revenue is CU 90 million. The firm's methodology sets planning materiality at 5% of normalised profit before tax for stable, profit-making clients. What is planning materiality for the financial statements as a whole?

A) CU 60,000, being 5% of the CU 1.2 million disposal gain, because the unusual item carries the greatest risk
B) CU 210,000, being 5% of the reported CU 4.2 million, because materiality follows the profit figure that users see
C) CU 150,000, being 5% of CU 3.0 million, which is profit before tax after removing the non-recurring disposal gain
D) CU 270,000, being 5% of CU 5.4 million, after adding the disposal gain back to reported profit before tax

Correct: C difficult ISA 320

The auditor chooses a benchmark that reflects the recurring size and performance of the entity, and ISA 320 notes that normalised earnings may be used where results include unusual items. A non-recurring gain would inflate the benchmark and so inflate materiality, so it is removed: CU 4.2m - CU 1.2m = CU 3.0m, and 5% of that is CU 150,000. Using the reported figure gives CU 210,000 and adding the gain back moves the wrong way, while applying the percentage to the gain itself confuses a risk area with the materiality benchmark.

2. Meghna Foods Ltd has total assets of CU 48 million. For this first-year audit the firm sets overall materiality at 1.5% of total assets. Firm policy sets performance materiality at 75% of overall materiality for established clients with sound controls, but at 60% where the audit is a first-year engagement or the control environment is weak. Both conditions apply here. Which pair of amounts is correct?

A) Materiality CU 432,000 and performance materiality CU 259,200, applying the 60% factor to both thresholds in turn
B) Materiality CU 720,000 and performance materiality CU 1,200,000, raising the threshold to cover the weaker controls
C) Materiality CU 720,000 and performance materiality CU 540,000, applying the established-client factor to a first-year audit
D) Materiality CU 720,000 and performance materiality CU 432,000, the lower factor reflecting higher risk of misstatement

Correct: D difficult ISA 320

Overall materiality is 1.5% x CU 48m = CU 720,000. Performance materiality is set below materiality to reduce to an appropriately low level the probability that uncorrected and undetected misstatements together exceed materiality, and the higher the assessed risk, the lower the percentage used. Here 60% x CU 720,000 = CU 432,000. Using the 75% factor ignores the stated risk conditions, dividing by 60% moves the threshold upwards, and applying the factor to overall materiality as well reduces the wrong amount.

3. In planning the audit of a distributor's revenue, the engagement team uses a quantitative model in which audit risk equals inherent risk x control risk x detection risk. The firm accepts overall audit risk of 5%. Inherent risk for revenue is assessed at 80% and, after satisfactory tests of controls, control risk is assessed at 50%. What level of detection risk is acceptable for the planned substantive procedures?

A) 2.0%, being 5% multiplied by (80% x 50%), which calls for very extensive substantive procedures on revenue
B) 12.5%, being 5% divided by (80% x 50%), which permits less extensive substantive work than if controls were ineffective
C) 6.25%, being 5% divided by the 80% inherent risk alone, because the entity's controls are not part of the auditor's model
D) 40%, being 80% multiplied by 50%, which gives the acceptable level of detection risk for the substantive tests

Correct: B difficult ISA 200

Rearranging the model, detection risk = audit risk / (inherent risk x control risk) = 0.05 / (0.80 x 0.50) = 0.05 / 0.40 = 12.5%. The product of inherent and control risk (40%) is the risk of material misstatement, not detection risk. Dividing by inherent risk alone ignores the controls assessment, and multiplying reverses the relationship, which would wrongly demand more work. The auditor can influence only detection risk, through the nature, timing and extent of procedures.

4. Meghna Foods Ltd sells 35% of its revenue to one supermarket chain, which has announced that from next year it will source half of its requirements from a competitor. Management has not yet adjusted its forecasts. How should the auditor treat this matter when planning the audit?

A) As a business risk outside the audit, because commercial strategy and customer concentration are matters for management alone
B) As audit risk in itself, because losing a major customer means the auditor could give an inappropriate opinion on the accounts
C) As an engagement risk only, because it affects the firm's fee recovery and exposure rather than the financial statements
D) A business risk that is relevant because it may create risks of material misstatement, such as in receivables and inventory

Correct: D difficult ISA 315 (Revised 2019)

ISA 315 (Revised 2019) requires the auditor to understand the entity's business model, strategies and related business risks, since these may result in risks of material misstatement. Here the loss of volume could affect inventory net realisable value, recoverability of receivables, provisions for onerous contracts and the going concern assessment. Business risk is wider than audit risk, which is the risk of an inappropriate opinion. Engagement risk concerns the firm's exposure, so neither of those labels removes the need to assess the effect on the financial statements.

5. At the planning meeting for Karnaphuli Cement Ltd, the manager notes that revenue consists of simple over-the-counter sales at list prices, that management is not under profit pressure, and that results have been stable for years. The senior proposes to rebut both the presumed fraud risk in revenue recognition and the management override risk. Which approach complies with the standard?

A) Rebut both presumed risks, because revenue and management override both depend on circumstances and stable results remove them
B) Rebut the management override risk because controls are strong, but keep the revenue risk as significant in every audit
C) Rebut neither presumed risk, because ISA 240 prohibits rebutting any presumption of fraud in revenue and in management override
D) Rebut the revenue risk only with documented reasons, but always treat management override of controls as a significant risk

Correct: D difficult ISA 240

ISA 240 presumes risks of fraud in revenue recognition, which the auditor may rebut where the circumstances justify it and the reasons are documented. Risk of management override of controls is present in all entities and cannot be rebutted, so procedures on journal entries, accounting estimates and significant unusual transactions are always required. Strong controls do not remove the risk, because management is able to override them.

6. Padma Textiles Ltd's inventory net realisable value allowance depends on subjective management judgements and has been assessed as a significant risk. The team proposes to rely on controls over the estimate using last year's satisfactory test results, as the controls have not changed, with no current-year control testing, and to add substantive analytical procedures. Which statement about this proposal is correct?

A) It is not acceptable, because controls relied on to address a significant risk must be tested in the current period, not carried forward
B) It is acceptable, because substantive analytical procedures give enough evidence once the controls have been understood and implemented
C) It is not acceptable, because no reliance on controls is allowed for a significant risk, so only substantive procedures may be used
D) It is acceptable, because controls unchanged since a satisfactory test may be relied on without retesting under a three-year rotation

Correct: A complex ISA 330

ISA 330 allows evidence on operating effectiveness from prior audits to be considered for some controls, but where the auditor plans to rely on controls over a risk assessed as significant, those controls must be tested in the current period. Understanding design and implementation is required for a significant risk but is not enough to support reliance. Reliance is not prohibited, so a wholly substantive approach is not compulsory, although such an approach would have to include tests of details.

7. Padma Textiles Ltd's revenue rose from CU 60.0 million to CU 78.0 million, while closing trade receivables rose from CU 9.9 million to CU 20.5 million. Credit terms are unchanged at 60 days. Using closing receivables and a 365-day year, which conclusion best reflects the use of analytical procedures as a risk assessment procedure?

A) About 125 days, using prior-year revenue as the denominator, which shows receivables days have more than doubled
B) About 96 days against 60 last year, an unexplained deterioration that raises the risk of overstated revenue and receivables
C) About 71 days, using average receivables, a modest rise that the 30% revenue growth explains, so the risk is unchanged here
D) About 96 days against 60 days last year, which confirms that receivables are overstated by about CU 7.6 million

Correct: B complex ISA 315 (Revised 2019)

Receivable days are CU 20.5m / CU 78.0m x 365 = about 96 days, against CU 9.9m / CU 60.0m x 365 = about 60 days. Receivables grew by 107% against revenue growth of 30%, so the balance is well above the CU 12.9m that unchanged terms would suggest. In planning, analytical procedures identify unusual relationships and so direct risk assessment, they do not prove a misstatement. Using average balances or last year's revenue as the base distorts the ratio.

8. At planning for Jamuna Pharma Ltd, the senior compares the draft gross margin of 31.2% with 31.0% last year and an industry average of 30.5%. She concludes that the risk of material misstatement in revenue and cost of sales is low and reduces the planned substantive work. Which evaluation of her conclusion is most appropriate?

A) Sound, because a margin consistent with prior year and industry is strong evidence of accuracy that supports reduced substantive work
B) Unsound, because analytical procedures are not permitted at planning, since ISA 520 limits them to substantive testing and final review
C) Unsound, because analytics use aggregated data giving only a broad indication, and stable ratios can mask offsetting errors or bias
D) Unsound, because the comparison should have used budget only, as industry and prior-year data are not reliable sources of expectations

Correct: C difficult ISA 520

ISA 315 (Revised 2019) requires analytical procedures as a risk assessment procedure, and industry and prior-year comparisons are normal expectation sources. However, at planning the data are aggregated and unaudited, so the procedures give only an initial indication of where risk lies. A stable margin may hide offsetting misstatements in revenue and cost, or deliberate manipulation to meet expectations, so it cannot justify reducing substantive work without further understanding.

9. At an interim visit to Surma Steel Ltd, the team finds that manual year-end journals are far more frequent than expected and that a cash flow forecast suggests a loan covenant breach. The strategy and plan were approved by the engagement partner two months ago. What should the engagement partner do?

A) Update the strategy and plan as needed, adjust the nature, timing and extent of procedures, and document the changes and reasons
B) Update the plan only after the client has agreed a revised fee, because any change to the planned work is a matter of contract
C) Revise the overall strategy only, because the detailed audit plan is fixed once the planning documentation has been approved
D) Keep the approved plan unchanged, because it was authorised at the planning stage, and record the new matters as completion points

Correct: A difficult ISA 300

ISA 300 treats planning as a continual and iterative process, and requires the auditor to update and change the overall audit strategy and audit plan as necessary during the audit. New risks, such as journal manipulation and covenant breach affecting going concern, change the assessment and so the planned procedures. Significant changes, and the reasons for them, must be documented. The fee is not a precondition, and the plan implements the strategy, so both move together.

10. Tista Garments Ltd has been an audit client for nine years, and in the team's experience management has always been honest. The engagement partner proposes to skip this year's team discussion on how the financial statements might be susceptible to fraud, to save budget hours, because the team is unchanged. How should the proposal be assessed?

A) Not acceptable, but the discussion may build on the team's belief in management integrity, since that belief supports scepticism
B) Acceptable, because the discussion is required only in first-year audits, where the team has no knowledge of management integrity
C) Not acceptable, because the discussion is required each audit and must set aside prior beliefs about the honesty of management
D) Acceptable, because with an unchanged team and no fraud found last year, the previous discussion may be rolled forward unchanged

Correct: C difficult ISA 240

ISA 315 (Revised 2019) and ISA 240 require the key members of the engagement team to discuss the susceptibility of the financial statements to material misstatement, including fraud, in every audit. ISA 240 states that the discussion should be held regardless of any belief that management and those charged with governance are honest and have integrity. Long familiarity is a reason for scepticism to be actively maintained, not a basis for relaxing it.

11. While planning the audit of Rupali Jute Mills Ltd, the team notes that gross margin fell from 22% to 15%. The finance director, who is respected and has been reliable in past years, explains orally that raw jute prices rose sharply and could not be passed on to customers. The explanation sounds plausible. Which response reflects professional scepticism?

A) Obtain a written representation from the finance director confirming the explanation, which then provides sufficient evidence
B) Corroborate the explanation, for example with supplier price lists, purchase invoices and sales records, before relying on it
C) Treat the explanation as an indication of fraud, extend procedures on all accounts and inform the regulator at once
D) Accept the explanation as it is plausible and fits the commodity market, and document the inquiry on the planning file

Correct: B difficult ISA 200

ISA 200 requires the auditor to plan and perform the audit with professional scepticism, which includes a questioning mind and a critical assessment of audit evidence. Inquiry alone does not give sufficient appropriate evidence, and a plausible explanation from a trusted source must still be corroborated with independent or documentary information. Scepticism does not mean assuming dishonesty, so reporting to a regulator is premature, and a written representation does not replace corroborating evidence.

12. At planning for Shitalakkhya Steel Ltd, the team notes net current liabilities of CU 8.5 million (current assets CU 18.4 million, current liabilities CU 26.9 million), a CU 12 million bank loan repayable in five months with no renewal agreed, and the loss of a major customer. Management states that the going concern basis is appropriate but has prepared no formal assessment. What is the appropriate planning response?

A) Defer all going concern work until completion, because ISA 570 requires procedures only once the draft financial statements are ready
B) Conclude now that a material uncertainty exists and plan a modified opinion, because net current liabilities alone require it
C) Treat going concern as a significant risk of misstatement, discuss management's plans, and plan to evaluate its assessment
D) Limit work to a written representation from management, because going concern is management's responsibility and the loan is disclosed

Correct: C difficult ISA 570

Net current liabilities, a maturing loan without renewal prospects and the loss of a major customer are all going concern indicators. ISA 570 requires risk assessment procedures at planning to consider whether events or conditions cast doubt, and the auditor should discuss with management its plans and request a formal assessment. The auditor then plans procedures on the cash flow forecasts and the feasibility of refinancing. A modified opinion cannot be concluded in advance, and a representation alone is not sufficient evidence.

13. During the audit of Chandpur Plastics Ltd, where overall materiality is CU 400,000, the senior finds that the finance director under-accrued CU 150,000 of year-end costs. The accrual was reduced after he saw that profit was CU 40,000 below the level needed for the management bonus and a loan covenant. Which evaluation is most appropriate?

A) It is below materiality, so it is a routine unadjusted item that need not be evaluated further unless it recurs next year
B) Deliberate intent proves fraud, so the auditor must at once conclude that the statements are not true and fair and withdraw
C) It cannot be fraud because no assets were stolen, so it should be treated as an error and left for management to correct
D) It may indicate management fraud though below materiality, so reassess fraud risk and the reliability of representations

Correct: D complex ISA 240

ISA 240 requires the auditor to evaluate whether an identified misstatement is indicative of fraud, and if so to consider the implications for other aspects of the audit, particularly the reliability of management representations, since fraud is unlikely to be an isolated occurrence. A misstatement involving management with a motive is qualitatively significant even below CU 400,000. Fraud is defined by intentional deception, not by theft of assets, and the auditor does not make a legal determination of fraud or automatically withdraw.

14. Rupsha Properties Ltd's investment property of CU 85 million, carried at fair value, is a significant risk. The team will engage an independent valuer as an auditor's expert. The audit opinion is expected to be unmodified, and the partner suggests naming the valuer in the report to show that the work was relied on. Which statement is correct?

A) The report should not refer to the expert, because the auditor alone is responsible for the opinion and must assess its objectivity
B) The valuer should be named, because disclosure of reliance on an expert transfers part of the responsibility for the opinion to the expert
C) The valuer may be named in any report, but doing so reduces the auditor's responsibility, so the objectivity evaluation can be omitted
D) No reference or evaluation is needed, because a professionally licensed valuer is presumed competent and objective by the auditor

Correct: A difficult ISA 620

ISA 620 requires the auditor to evaluate the competence, capabilities and objectivity of an auditor's expert, and to evaluate the adequacy of the expert's work. The auditor has sole responsibility for the opinion, and that responsibility is not reduced by using an expert. For this reason the auditor must not refer to the expert in a report with an unmodified opinion unless law or regulation requires it. Professional qualifications do not remove the need for the evaluation.

15. At planning, Bhairab Metals Ltd's materiality was set at 5% of forecast profit before tax of CU 5.0 million, with performance materiality at 75% of materiality. Final draft profit before tax is CU 3.4 million. The team has an uncorrected misstatement of CU 200,000 in provisions that was below the original materiality. What is the appropriate action?

A) Revise materiality to CU 170,000 and performance materiality to CU 127,500, then revisit procedures, as CU 200,000 now exceeds it
B) Keep materiality at CU 250,000, since it was based on the best information at planning and is revised only if it needs to increase
C) Revise materiality to CU 127,500 and performance materiality to CU 95,625, applying the 75% factor to both thresholds in turn
D) Revise materiality to CU 170,000 but keep performance materiality at CU 187,500, so that the planned sample sizes remain valid

Correct: A complex ISA 320

Original materiality was 5% x CU 5.0m = CU 250,000, and performance materiality 75% x CU 250,000 = CU 187,500. ISA 320 requires the auditor to revise materiality if information becomes known during the audit that would have led to a different amount. Revised materiality is 5% x CU 3.4m = CU 170,000, and performance materiality is 75% x CU 170,000 = CU 127,500. The CU 200,000 misstatement now exceeds materiality, and the auditor must reconsider the nature, timing and extent of procedures, which keeping the old thresholds would not allow.

16. The audit manager of Kushtia Spinning Ltd prepares Document X, which sets the scope, timing and direction of the audit and guides the audit plan. Document Y sets out the nature, timing and extent of the procedures, including risk assessment procedures, to be performed by team members. How are these documents described under ISA 300?

A) Document X is the audit plan and Document Y is the audit strategy, because the plan comes first and the strategy turns it into procedures
B) Both are the audit strategy, because ISA 300 uses a single document to set out the scope, the timing and the detailed procedures
C) Document X is the overall audit strategy and Document Y is the audit plan, which shows how the strategy will be implemented
D) Both are the audit plan, because the strategy is the engagement letter and so does not set out the scope or timing of the audit

Correct: C difficult ISA 300

The overall audit strategy sets the scope, timing and direction of the audit and guides the development of the audit plan. The audit plan is more detailed: it sets out the nature, timing and extent of audit procedures, including risk assessment procedures, to be performed by engagement team members to obtain sufficient appropriate audit evidence. The plan therefore shows how the overall strategy will be implemented. The engagement letter is a separate document that agrees the terms with the client.

17. An audit trainee on Mymensingh Dairy Ltd proposes to obtain an understanding of the entity and its environment by making enquiries of the finance director alone, on the ground that management knows the business best. Which statement about ISA 315 (Revised 2019) is correct?

A) Enquiry alone is not enough; a combination of enquiry, analytical procedures, and observation and inspection is used
B) Enquiry of senior management is sufficient on its own, as ISA 315 treats management as the most reliable source of information about the entity
C) Every one of the available procedures must be performed for every area of the entity, so the auditor cannot choose between them
D) Understanding is obtained only from prior-year working papers, so no enquiries or other procedures are needed in a recurring audit

Correct: A difficult ISA 315 (Revised 2019)

ISA 315 requires a combination of procedures to obtain the understanding of the entity: enquiries of management and others within the entity, analytical procedures, and observation and inspection, together with prior-period knowledge and a team discussion. The auditor need not use every procedure for each area, but enquiry alone is not enough, as observation and inspection corroborate the answers to enquiries. In a recurring audit, prior knowledge may be used only after determining whether changes have affected its relevance.

18. At the planning stage for Bhola Marine Ltd, the auditor notes a net current liability position, a term loan maturing in four months with no realistic prospect of renewal, the loss of its largest customer, and management forecasts that rely on optimistic assumptions. What should the auditor do under ISA 570 (Revised)?

A) Accept management's assessment, because preparing the going concern assessment is management's responsibility and not the auditor's
B) Defer all consideration of going concern to the completion stage, since the conclusion cannot be reached until the draft statements exist
C) Prepare an independent forecast for the company, because the auditor is responsible for deciding whether the company is a going concern
D) Treat these as going concern indicators, assess management bias and obtain evidence on management's assessment

Correct: D difficult ISA 570 (Revised)

ISA 570 requires the auditor to obtain evidence on whether a material uncertainty exists and on the appropriateness of management's use of the going concern basis. At planning this involves risk assessment procedures and consideration of whether there is management bias, such as choosing assumptions that give a favourable outcome. The items described are typical indicators listed in the ISA. The auditor evaluates management's assessment, and does not prepare its own forecast, but must not simply accept it. Going concern is considered at planning, not only at completion.

19. In planning the audit of Pabna Plastics Ltd, the auditor compares the budget with the draft actual figures. Budget: sales CU 2,400,000, cost of sales CU 1,560,000. Actual: sales CU 2,380,000, cost of sales CU 1,785,000. What is the appropriate conclusion from this analytical procedure?

A) No further work, because sales are within 1% of budget and so the draft figures are consistent with expectations
B) Gross margin fell from 35.0% to 25.0% on stable sales; investigate cost of sales and inventory
C) Fraud has occurred in cost of sales, because a fall in gross margin of ten percentage points can only be caused by deliberate misstatement
D) Gross margin rose from 25.0% to 35.0%, so the auditor should concentrate on possible overstatement of sales and receivables

Correct: B difficult ISA 315 (Revised 2019)

Budgeted gross profit is CU 840,000, which is 35.0% of sales; actual gross profit is CU 595,000, which is 25.0% of sales of CU 2,380,000. Sales are on budget, but cost of sales is 14.4% higher, so the fall in margin is unexplained. Analytical procedures at the planning stage identify such areas of risk and direct audit work to them, here to cost of sales, inventory valuation and cut-off. A fluctuation does not prove fraud, as there may be innocent explanations, and the margin fell, not rose.

20. Bagerhat Foods Ltd has revenue of CU 126 million and trade receivables of CU 18.9 million at year end; last year the figures were CU 120 million and CU 12.6 million. Credit terms are 45 days. The auditor calculates the trade receivables collection period using receivables x 365 / revenue. What is the result and its significance?

A) 2,433 days, because revenue is divided by receivables; this shows that receivables are being collected extremely quickly
B) 35 days, down from 38 days; collection has improved, so the risk of overstated receivables has reduced
C) 66 days, because receivables are measured against cost of sales; this shows the company is paying its suppliers late
D) 55 days, up from 38 and beyond the 45-day terms; this raises the risk of overstated receivables

Correct: D difficult ISA 315 (Revised 2019)

The collection period is 18.9 / 126 x 365 = 54.75, about 55 days. Last year it was 12.6 / 120 x 365 = 38.3 days. Collection has slowed and now exceeds the credit terms of 45 days, which indicates a risk that some receivables are irrecoverable and that the allowance for credit losses is understated. The ratio divides receivables by revenue, not the reverse, and relates to receivables, not payables.

21. Overall materiality for Sylhet Tea Ltd is CU 900,000. During planning the auditor finds that the company made an unauthorised loan of CU 40,000 to a director. The audit senior says it can be ignored as it is far below materiality. Which view is correct?

A) The loan may be material by nature, because transactions with directors are considered material regardless of value
B) The loan is immaterial, because materiality is a purely quantitative threshold and CU 40,000 is only 4.4% of the overall level
C) The loan is material only if it exceeds performance materiality, which is the same as overall materiality for transactions with directors
D) The loan is material only to the director, because materiality considers the needs of specific individuals, not users as a group

Correct: A difficult ISA 320

Materiality has qualitative as well as quantitative aspects, and it should not be regarded simply as a percentage of items in the financial statements. Transactions relating to directors are considered material by nature regardless of their value. Materiality is judged by reference to users taken as a group, not individuals, and performance materiality is set below overall materiality, so it is not the same figure.

22. For Gazipur Garments Ltd, total assets are CU 60 million and overall materiality is set at 1.5% of total assets. Receivables are CU 12 million. The auditor sets performance materiality for receivables in proportion to their share of total assets, then reduces that amount by 25% because receivables are a high-risk area. What is performance materiality for receivables?

A) CU 900,000, because performance materiality for a balance equals overall materiality for the financial statements as a whole
B) CU 180,000, because the proportionate figure is already prudent and no further reduction should be made for risk
C) CU 135,000, being the proportionate CU 180,000 reduced by 25% to give a greater margin of safety for the higher risk
D) CU 225,000, because a higher assessed risk means that performance materiality must be increased above the proportionate amount

Correct: C difficult ISA 320

Overall materiality is 1.5% x CU 60 million = CU 900,000. Receivables are 12/60 = 20% of total assets, so the proportionate amount is 20% x CU 900,000 = CU 180,000. Performance materiality provides a margin of safety, and the higher the assessed risk, the lower it must be set. Reducing CU 180,000 by 25% gives CU 135,000. Performance materiality is always set below overall materiality, and increasing it for higher risk would reduce, not increase, the audit work.

23. At planning, the auditor of Narsingdi Steel Ltd set materiality at 5% of draft profit before tax of CU 8.0 million. During the audit, adjustments for material misstatements reduce the profit before tax to CU 5.0 million. What should the auditor do about materiality?

A) Keep materiality at CU 400,000, because it was agreed at the planning stage and cannot be changed once audit work has started
B) Revise materiality to CU 250,000, because it must be reviewed as the audit progresses and reconsider the planned audit procedures
C) Revise materiality to CU 650,000, being 5% of the total of the original and adjusted profit figures, to reflect all of the information
D) Increase materiality, because lower profit means that misstatements are now a larger part of profit and so matter less to users

Correct: B difficult ISA 320

Materiality must be reviewed constantly as the audit progresses, because draft financial statements may be altered and risk estimates may change. At 5% of CU 5.0 million the revised level is CU 250,000, compared with the original CU 400,000. A lower materiality means that previously immaterial misstatements may now be material, so the nature, timing and extent of procedures must be reconsidered. It cannot remain unchanged merely because it was set at planning.

24. The directors of Jamuna Power Ltd say its qualitative climate-related disclosures are immaterial because the related amounts in the financial statements are small. Investors use these disclosures in decisions on green finance. How should the auditor assess materiality for these disclosures?

A) Accept the directors' view, because qualitative disclosures can never be material while the amounts recognised are below overall materiality
B) Ignore them, because climate matters are outside the scope of ISA 320 and are dealt with only in a separate sustainability engagement
C) Treat them as material only if the entity is obliged by law to publish a separate sustainability report that contains the same disclosures
D) Recognise that climate-related disclosures are by their nature important to users, and consider how management evaluated their materiality

Correct: D difficult ISA 320

Climate-related risks affect the determination of materiality and performance materiality under ISA 320. Where investors use sustainability and climate information in economic decisions, the auditor takes this into account. By their very nature, sustainability and climate-related disclosures are always considered important to users, so the auditor must consider how management evaluated them, including judgements about recognition and measurement. They are not excluded merely because amounts are small, and no separate report is needed to make them relevant.

25. In the audit of Rangpur Cables Ltd, the auditor identifies four matters: (i) one clerk records receipts and also posts the receivables ledger; (ii) the provision for warranty claims is a complex estimate; (iii) the auditor selects too small a sample for testing; (iv) the company trades in a volatile commodity market. Which classification of these under the audit risk model is correct?

A) (i) control risk; (ii) inherent risk; (iii) detection risk; (iv) inherent risk
B) (i) inherent risk; (ii) control risk; (iii) detection risk; (iv) control risk
C) (i) control risk; (ii) detection risk; (iii) inherent risk; (iv) control risk
D) (i) detection risk; (ii) inherent risk; (iii) control risk; (iv) inherent risk

Correct: A difficult ISA 200

Control risk is the risk that the entity's internal controls will not prevent or detect a misstatement, as where one clerk handles both receipts and ledger posting without segregation. Inherent risk arises from the nature of the item or the entity, such as complex estimates or a volatile market, before considering controls. Detection risk is the risk that the auditor's own procedures fail to detect a material misstatement, as with an inadequate sample. Detection risk is the only component that the auditor controls.