Question
a junior auditor working for ab Accounting Firm is included in the audit team engaging in the audit the Financial Reports of Complicated Ltd., a
a junior auditor working for ab Accounting Firm is included in the audit team engaging in the audit the Financial Reports of Complicated Ltd., a listed company on AST. When evaluating audit results for assets in the audit, Alexander has set the preliminary judgment about materiality to be $67,000. He then allocated the materiality to all the asset accounts. The account balances, performance materiality and estimated overstatements in the accounts are shown below:
Account |
| Account balance | Performance materiality | Estimate of total overstatements |
Cash |
| 60,000 | 6,000 | 5,500 |
Account receivable |
| 1,300,000 | 20,000 | ? |
Inventory |
| 2,100,000 | 60,000 | 45,000 |
Other assets |
| 360,000 | 24,000 | 23,000 |
Total |
| 4,090,000 | 110,000 |
|
Alexander has chosen a sample of $500,000 in Accounts Receivable. He tested it and uncovered $6000 in overstatement. He then checked on the individual accounts and all accounts in the total assets against the allocated performance materiality and the preliminary materiality to decide the acceptability of the financial statements.
Required:
a. Ignoring sampling risk, what is the estimate of the total misstatement in Accounts Receivable?
b. Why the total performance materiality is not the same as the preliminary materiality? Should they be equal?
c. Based on the audit of the asset accounts and ignoring other accounts, are the overall financial statements acceptable?
d. What do you believe the auditor should do in the circumstances?
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