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Materiality Methodology: Planning materiality (PM) is determined as follows: (1) For public clients, we base materiality on 5-8% of the prior year's net income unless
Materiality Methodology:
Planning materiality (PM) is determined as follows:
(1) For public clients, we base materiality on 5-8% of the prior year's net income unless the client is at a loss or close to breaking even, in which case we base materiality on .5 - 1 % of total assets.
(2) For private clients, we base materiality on 1-3% of the prior year's equity.
Tolerable misstatement (TM) is set at 40 - 70 % of PM.
Required:
- Using the financial statements document and following the guidelines document, compute financial statement level materiality (note the audit firm calls financial statement level materiality, PM planning materiality) for the year ending December 31, 20x2. Show your calculations in detail and in a short paragraph explain the rationale you followed to determine the percentage you used.
- Using the financial statements and the guidelines document, compute performance materiality for the Accounts Receivable account (note the audit firm calls performance materiality, TM tolerable misstatement) for the year ending December 31, 20x2. Show your calculations in detail and in a short paragraph explain the rationale you followed to determine the percentage you used.
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