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Auditing

Lecture 3 & 4

Going concern, assurance vs audit, materiality, performance materiality, clearly trivial thresholds, and audit report scope.

Question 6 of 9

Case: Determining overall materiality

You are planning the audit of AlphaTech Manufacturing S.A. for the year ended 31 December 2025.

Financial information

  • Profit before tax: €5,000,000
  • Revenue: €100,000,000
  • Total assets: €80,000,000

Possible overall materiality amounts

  • Profit before tax at 5% = €250,000
  • Revenue at 1% = €1,000,000
  • Total assets at 1.5% = €1,200,000

Additional background

  • The company is a mature manufacturing business.
  • Profit is stable and consistent with prior years.
  • Shareholders and lenders focus closely on profitability and operating performance.
  • Management bonuses are partly linked to profit targets.
  • Revenue is high, but profit is the key performance measure for users.

Required

  1. Consider the three possible benchmarks above.
  2. Choose the most appropriate benchmark for overall materiality.
  3. State the percentage and amount you would use.
  4. Briefly justify why that benchmark is more appropriate than the other two.

Write your answer in your own words. It will be graded with Gemini.

Answer freely: concise wording is fine as long as it covers the lecture point.