Tick and Bash is the auditor of Alex Manufacturing Ltd and has set materiality thresholds such that items under £40,000 are not generally considered material.
For each of the following items in Alex Manufacturing Ltd’s financial statements, select whether the auditor would usually test it for overstatement, for understatement, whether the item would not be tested at all, or whether it should be referred to a senior colleague.
- £1,000 due from Jonny, a director of Alex Manufacturing Ltd.
Select ONE answer:
- Not Test
- Consult a senior colleague
- Understatement
- Overstatement
Show your workings to arrive at your answer, and explain and justify your reasons:
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This multiple-choice question is suitable for Accounting KS5 classes.
The answer is 4
- Not correct
- Not correct
- Not correct
- Correct – the amount is an asset, so we test primarily for overstatement. The amount owed is considered irrespective of the materiality threshold due to the nature of the item (i.e. a director’s loan).
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