1) For many years the financial and accounting community has recognized the importance of the use of audit committees and has endorsed their formation. By now the use of audit committees has become widespread. Independent auditors have become increasingly involved with audit committees and consequently have become familiar with their nature and function. Required: a. Describe what an audit committee is. b. Identify the reasons why audit committees have been formed and are currently in operation. c. Describe the functions of an audit committee.

2) For each of the following scenarios, perform the three steps in the materiality process: (1) determine planning materiality, (2) determine tolerable misstatement, and (3) evaluate the audit findings.

Scenario 1:

Murphy & Johnson is a manufacturer of small motors for lawnmowers, tractors, and snowmobiles. The components of its financial statements are (1) net income before taxes = $21 million, (2) total assets = $550 million, and (3) total revenues = $775 million. Murphy & Johnson uses maximum percentage applicable on net income for determining planning materiality.

a.	Determine planning materiality, and tolerable misstatement. Justify your decisions. During the course of the audit, Murphy & Johnsons CPA firm detected two misstatements that aggregated to an overstatement of net income of $1.25 million.

Planning materiality	$
Tolerable misstatement	$

b.	Evaluate the audit findings. Justify your decisions.

Scenario 2:

Delta Investments provides a group of mutual funds for investors. The components of its financial statements are (1) net income before taxes = $40 million, (2) total assets = $4.3 billion, and (3) total revenues = $900 million. Murphy & Johnson uses maximum percentage applicable on total assets for determining planning materiality.

a.	Determine planning materiality, and tolerable misstatement. Justify your decisions. During the course of the audit, Deltas CPA firm detected two misstatements that aggregated to an overstatement of net income of $5.75 million.

Planning materiality	$
Tolerable misstatement	$

b.	Evaluate the audit findings. Justify your decisions.

Scenario 3:

Swell Computers manufactures desktop and laptop computers. The components of the financial statements are: (1) net income before taxes $500,000, (2) total assets = $2.2 billion, and (3) total revenues = $7 billion. Swell Computers uses total assets for determining planning materiality.

a.	Determine planning materiality and tolerable misstatement. Justify your decisions. During the course of the audit, Swells CPA firm detected one misstatement that resulted in an overstatement of net income by $1.5 million.

Planning materiality	$
Tolerable misstatement	$

b.	Evaluate the audit findings. Justify your decisions.