You are the partner in charge of the audit of K. The following matter has been brought to your attention in the audit working papers. The entity has refused to write the closing inventory down to the lower of cost and net realizable value, despite the requirements to do so in IAS 2. The audit senior estimates that closing inventory has been overstated by $500,000 because of this.
The draft financial statements show turnover of $40 million and profit of $4.5 million.
(a) Explain what is meant by the term ‘materiality’. Explain whether the matter highlighted above is material, giving reasons.
(b) Assuming that the directors refuse to amend the financial statements, explain what type
of audit report would be appropriate to the above statements.