You are the audit manager for Ken-Ron Enterprises. Your firm has been the entity’s auditor for 15 years. Your firm normally uses a range of 3% to 5% of income before taxes 

to calculate overall materiality and 50–75% of overall materiality to calculate tolerable misstatement. Ken-Ron has reported the following financial statement data (in millions) for the last four years:

Required:

a. If you planned on using income before taxes as the benchmark to compute overall materiality and tolerable misstatement, how would you compute those amounts for 2015? Prepare and justify your calculations.

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b. Determine overall materiality and tolerable misstatement using either total assets or total revenues as the benchmark. Make the calculations by utilizing both .25% and 2%, the endpoints of the range that your firm’s guidance provides.

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c. Assume that during the course of the 2015 audit you discovered misstatements totaling $50 million (approximately 50% of the 2015 income before taxes of $105 million). Discuss whether this amount of misstatement is material given your benchmark calculations from parts a. and b. above.
 

2015 2014 2013 2012 Income before taxes 105* 584 520 453 Total assets 23,422 16,137 13,239 11,966 Total revenues 20,272 13,289 9,189 8,984 *Note that the significant decline in income before taxes in 2015 is due to a large non- recurring charge.