Instructions: For the first three scenarios, you are the auditor (you are right out of school and this is your first audit) on the audit with a supervisor and manager on site with you. Materiality is set at $20,000, tolerable misstatement $15,000 and trivial $3,000. Please respond with your thoughts as to how you should handle the situation and possible issues that could have created the circumstances (internal control issues/errors/management overrides etc).

Case Study #3 You are auditing revenues and expenses. The primary audit procedure is to compare current year income and expenses with the prior year and explain significant variances. To explain the differences, you interview the Controller. You learn that sales have increased due to higher volume of sales. Due to production enhancements, gross margins have improved. During the year, a number of employees were laid off and rehired two months later. The Controller refers you to the CEO to explain certain changes. The CEO's responses strike you as hedging -- deceptive and purposeful in response.