Using the given balance sheet for EarthWear Co, and the attached materiality multiplier table, discuss in steps how the auditor could benefit from applying materiality concept in an auditing process to determine:

Required

1. the NET of the audit.

2. give the appropriate opinion about the fairness of the presented financial statement.

Additional necessary information for solution:

1. You are advised to audit 100% the following accounts: lines of credit, income taxes payable, deferred income taxes, and all accounts related to shareholders investments.

2. Retained earnings is considered residual value and needs not to be audited.

3. You identified strong control procedures for credits sales.

4. As well, control procedures for purchasing cycle were found strong.

5. You need to consider the quick change of customers preferences regarding EarthWear clothes.

6. Property, Plant, and Equipment were not audited since years.

7. You need to register your own observations of actual misstatements in various accounts.

  

Consolidated Balance Sheet December 31, 2000 (In thousands) farthWear Assets Cash and cash equivalents 41,772 Receivables 3,933 Inventory 64,100 Prepaid advertising 4,980 Other prepaid expenses 2,448 Deferred income tax benefits 5,185 Property, plant, and equipment, net Intangibles, net 46,658 1,045 Total assets $ 170,121