Materiality. Via the internet, get the latest balance sheet and income statement of Nokia, an international manufacturer of portable telephones headquartered in Finland. At the www.Nokia.com website click investors, click reports, click financial reports, finally click annual information or use the site search box using the terms Nokia’s financial statements.

Required:

A. Use professional judgment in deciding on the initial judgment about materiality for the basis of net income, current assets, current liabilities, and total assets. State materiality in both percentages of the basis and monetary amounts.

B. Assume materiality for this audit is 7 percent of earnings from operations before income taxes. Furthermore, assume that every account in the financial statements may be misstated by 7 percent and each misstatement is likely to result in an overstatement of earnings. Allocate materiality to these financial statements.

C. Now, assume that you have decided to allocate 80 percent of your preliminary judgment

(on the basis of earnings from operations before taxes) to accounts receivable, inventories, and accounts payable. Other accounts on the balance sheet are low in inherent and control risk. How does this allocation of materiality impact on evidence gathering?

D. After completing the audit you determine that your initial judgment about materiality for current assets, current liabilities, and total assets has been met. The actual estimate of misstatements in earnings exceeds your preliminary judgment. What should you do?