II. Materiality:

STUDENT 2 (Name):______________________________

NOTE: You will need to review the Financial statements provided see file "Exercise #1- Financial Statements- Technology Inc" attached in Blackboard.

As it is our first year auditing Technology Inc. and starting the audit we need to determine a few things:

Required:

1)What would be a good basis to set materiality (Revenue, Assets, Equity, etc) for Technology Inc.? (Think about the definition of materiality, and what would be important to shareholders- do they care about profitability or how many assets the company has acquired.) (Think about if the company is a non-profit, a start-up, oriented towards building up assets, profitable, etc. Use these factors in your explanation.) (Pick 1 letter and & Explain why.) [EX: B. Net Income because.......]

a.Revenue

b.Net Income

c.Total Assets

d.Total Equity

5.__________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

2)What percentage (higher percentage or a lower percentage) would you use for the benchmark you selected in Q5 above? (Pick an actual percentage ex: 5% or 1%, or 10%, based on the guidance below.) (EX: 5% of Net Income vs 10% of Net Income)? Explain why? Your choice should be based on the Inherent risk and control risk determined in questions 1-4 above. [Click on one of the boxes below to select your answer, check only one box.]

a. 5 percent of net income before taxes.

b. 10 percent of net income before taxes.

c. percent of total assets.

d. 1 percent of total assets.

e. percent of total revenues.

f. 1 percent of total revenues.

g. 1 percent of total equity.

h. Less than 1 percent of total Equity

3)What does picking a larger or smaller % for materiality mean to our detection risk? (Example if you picked 10% or 5% does that mean Detection risk is high or low.) (See slides for guidance on how to answer this question.) [Click on one of the boxes below to select your answer, check only one box.]

a. Picked a Larger % for materiality, this means Detection Risk is higher.

b. Picked a Smaller % for materiality, this means Detection Risk is lower.

4)Using the financial statements and the answers to the questions above calculate materiality for our audit of Technology Inc. (Calculate Overall materiality, Tolerable Misstatement (use 50% or 75% of overall Materiality), and Deminimis Materiality (use 5% or 10%). (Show your calculation and the number you calculated.)

-EX: Benchmark %(1%) * Assets ($25m)= $250K (Overall Materiality)

-EX:-Tolerable Misstatement = 50% * Overall Materiality [$250K* 50% = $125k]

-EX: Deminimis Materiality = 5% of Tolerable Misstatement [$125K * .05 = $6,250 ).

a.Overall Materiality=_______________________________________________________

b.Tolerable Misstatement=___________________________________________________

c.Deminimis Materiality=____________________________________________________

5)Look at the Income statements and answer the following questions: [Click on one of the boxes below to select your answer, check only one box.]

- i. Are any accounts larger or smaller than Overall Materiality?

A) YES

B) No

- ii. What does this mean do we have to audit all of these accounts?

A) YES

B) No

- iii. Are those accounts significant?

A) YES

B) No