4) You are auditing prepaid expenses. The total balance is $2 million. Assume you used

sampling and you selected three items to test. You compared them to the supporting

documentation and found the following:

Item 1 - recorded correctly as $5,000

Item 2 - recorded correctly as $3,000

Item 3 - recorded as $2,000, but it was a typo, and it should have been recorded as $200.

Assume the overall materiality is $500,000, the performance materiality is $400,000. Does the

result of your test suggest a potential material misstatement in prepaid expenses? Explain how

you determine that.