The materiality trap in an audit of a specific element Apex Ltd.

The materiality trap in an audit of a specific element

Apex Ltd. asks its statutory auditor, M & Co., to perform a separate audit of its accounts receivable schedule as at 31 March 2026 for submission to a lender.

M & Co. is also the auditor of Apex Ltd.’s complete financial statements.

The following facts are relevant:

Materiality determined for the audit of the complete financial statements is ₹8 crore.
For the separate audit of the accounts receivable schedule, M & Co. determines materiality of ₹1 crore to be appropriate.
The accounts receivable schedule contains an uncorrected misstatement of ₹1.4 crore.
The misstatement is material to the schedule but is not material to the complete set of financial statements.
The schedule is prepared in accordance with the same applicable financial reporting framework.
No limitation on audit procedures exists.

The engagement partner states:

“Since the misstatement is not material to the complete financial statements, an unmodified opinion should also be issued on the accounts receivable schedule.”

Which ONE of the following is the most appropriate conclusion?

A.

The partner’s conclusion is inappropriate because materiality is determined in the context of the specific financial statement or element being audited, and a misstatement material to that element can require modification even when immaterial to the complete financial statements.

B.

The partner’s conclusion is appropriate because an element extracted from audited financial statements cannot be subject to a lower materiality threshold once the complete financial statements have already been audited.

C.

The partner’s conclusion is appropriate unless the lender specifically requires a separate materiality assessment, because SA 805 ordinarily uses the materiality determined for the complete set of financial statements.

D.

The partner’s conclusion is inappropriate only if the misstatement exceeds ₹8 crore, because the auditor’s reporting threshold must remain consistent between the complete financial statements and the specific element.