Reference no: EM133152985

Question - Described below are situations which have arisen in two audit clients of your firm. The year end in each case is 31 March 2022

Finch plc (Finch) - Finch has included the results of Wren Ltd ('Wren'), a subsidiary, in the consolidated financial statements. Wren is audited by a different firm of auditors who have modified their opinion on Wren's financial statements for the year ended 31 March 2022 because a fire at the company's premises destroyed the physical inventory count sheets which were the only record of the year end inventory. Wren has included inventory at its estimated cost of $500,000 in the financial statements for the year ended 31 March 2022. The consolidated pre-tax profit of Finch is $33.4 million and the pre-tax profit of Wren is $1.2 million for the year ended 31 March 2022.

Sparrow Ltd (Sparrow) - On 30 April 2022, the board of directors decided to undertake a restructuring programme which would commence in June 2022. A provision of $1.8 million in respect of the restructuring costs has been included in the financial statements for the year ended 31 March 2022. The pre-tax profit of Sparrow for the year ended 31 March 2022 is $7.2 million.

Required -

1. Discuss what is meant by the concepts of materiality and a true and fair view.

2. Explain why there can be difficulties for auditors regarding materiality and true and fair in relation to the two cases above: Finch and Sparrow.