CA Vir was appointed as the auditor of Rise Limited for the financial year 2024-25. During the course of planning for the audit, CA Vir intends to…

Use of Benchmarks in Determining Materiality for the Financial Statements as a Whole: As per SA 320, determining materiality involves the exercise of professional judgment. A percentage is often applied to a chosen benchmark as a starting point in determining materiality for the financial statements as a whole. Factors that may affect the identification of an appropriate benchmark include the following: The elements of the financial statements (for example, assets, liabilities, equity, revenue, expenses);Whether there are items on which the attention of the users of the particular entity's financial statements tends to be focused (for example, for the purpose of evaluating financial performance users may tend to focus on profit, revenue or net assets);The nature of the entity, where the entity is at in its life cycle, and the industry and economic environment in which the entity operates;The entity's ownership structure and the way it is financed (for example, if an entity is financed solely by debt rather than equity, users may put more emphasis on assets, and claims on them, than on the entity's earnings); andThe relative volatility of the benchmark. Determining a percentage to be applied to a chosen benchmark involves the exercise of professional judgment. There is a relationship between the percentage and the chosen benchmark, such that a percentage applied to profit before tax from continuing operations will normally be higher than a percentage applied to total revenue. (i) In case if Rise Limited is engaged in manufacture and sale of air conditioner, and is having regular profits: CA Vir, the auditor may consider profit before tax /Earnings. (ii) In case Rise Limited is engaged in the construction of large infrastructure projects and incurred losses in the previous two financial years, due to pandemic: CA Vir, the auditor may consider Revenue or Gross Profit as benchmarking. Alternatively, CA Vir, the auditor may consider the criteria relevant for audit of the entities doing public utility programs/ projects, Total cost or net cost (expenses less revenues or expenditure less receipts) may be appropriate benchmarks for that particular program/project activity. Where an entity has custody of the assets, assets may be an appropriate benchmark.