Basic Question: Scope, Coverage 2608

  • Hello there,
    I have some very basic (some might call it stupid :oops: ) questions.
    The first relates to scoping. I will try to illustrate it with an example:
    One firm contributes to about 1/6 of the group other currnet assets (material line item).
    The ‘fitness scheme’ contributes to 1/50 to the other current assets of this firm (far below materiality).
    Can this account (‘fitness scheme’) be left out of scope?
    If so- how does this effect your coverage calculation?
    I hope I gave enough info- if you need more details, please let me know.
    Thanks in advance for helping me.
    Yours Nett

  • Are you saying that an enitity’s other current assets make up one sixth of the consolidated other current assets of the group? What is included in other current assets in this case? Value added tax paid on purchases? Prepayments made to suppliers?
    Whether some item is in scope for management’s evaluation or the auditor’s audit does not only depends on the monetary amount, but also on the inherent risk or errors or fraud associated with this item and on the initial assessment of control risk for that item.
    In addition, materiality is from the point of view of an investor. Typically an investor uses discounted future cash flows to determine the value of a security of the company. The financial statements are used as inputs to make estimates of future cash flows. That being said, it also depends whether an item is a one-time item or a recurring item. In addition, materiality also depends on whether the company is making losses or is otherwise in danger of not being able to pay interest on its debt and repay its debt. In turnaround situations even small amounts can be material for investors in the equity of the firm since they may decide whether their equity is worthless or whether the firm may make a profit in the future. That being said other current assets may be completely immaterial for the investor.
    In conclusion, materiality is a smart concept and not some dumb rule of thumb percentage of profit or total assets.

  • Agree with what gmerkl has said.
    Scoping is something that is subjective, but principally based on two factors - materiality and risk.
    There are no specific coverage requirements set down anywhere, you really just have to have a justifiable framework for this that you can sell to your auditors. Coverage gained from line items in scope could be one factor as would absolute materiality of a line item.
    When thinking about risk you are considering factors such as, inherent risk in the account, degree of subjectivity, volatility of the balance, etc.
    There are no right answers on this, you just need to pull something together that works for you.
    Note: there are also a number of posts on here about materiality from an audit perspective, you should bear these in mind as this will be the lense that your auditor looks at things through.

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