On attached file, question 15. How do I figure out the tolerable Misstatement as % of Planning Materiality? The answer I filled in are incorrect.

Assignment Print View Page 1 of 7 http://ezto.mheducation.com/hm.tpx 5/29/2017 Assignment Print View Page 2 of 7 Suppose that you are the auditor of a major retail client who has reported the following income before taxes (IBT) for the first two quarters of the year: 1st quarter = $1,200,000 and 2nd quarter = $1,500,000. You are in the process of establishing overall materiality for the client. Based on prior years, the client has a 10% decline in IBT from the 2nd quarter to the 3rd quarter. You also know that IBT in the 4th quarter increases by 25% over the 3rd quarter. Required: Determine the amount of overall materiality for the audit based on these preliminary amounts. (Round your answer to the nearest thousand value.) Amount of overall materiality $ 287000 http://ezto.mheducation.com/hm.tpx 5/29/2017 Assignment Print View Page 3 of 7 References Worksheet Learning Objective: 03-11 Know the steps to applying materiality in an audit. Difficulty: 3 Hard Learning Objective: 03-12 Apply the materiality steps to an example (EarthWear). http://ezto.mheducation.com/hm.tpx 5/29/2017 Assignment Print View Page 4 of 7 http://ezto.mheducation.com/hm.tpx 5/29/2017 Assignment Print View Page 5 of 7 In this mini-case you will determine overall materiality as well as tolerable misstatement amounts for balance sheet accounts of EarthWear Clothiers, Inc. Most auditing firms use a simple approach for establishing planning materiality and tolerable misstatement similar to the one illustrated in your textbook. This case illustrates such an approach, with some additional guidance from Willis & Adams relating to the amount of tolerable misstatement to allocate to various balance sheet accounts based on difficulty to audit and expected misstatement, and limiting the total amount of tolerable misstatement to about ten times materiality. INSTRUCTIONS: Read the Materiality Guidelines for Willis & Adams CPAs. To open the guidelines document please double-click on the following icon. A document will open in Microsoft Word. Following the Materiality Guidelines for Willis & Adams CPAs, complete all the necessary fields on Work Paper 3-7 and 3-8. For your Convenience, EarthWear Financial Statements have been included for reference. Balance Sheet. Income Statement. Cash Flows. Shareholders Investments. Five-Year Financial Summary. Work Paper 3-7: http://ezto.mheducation.com/hm.tpx 5/29/2017 Assignment Print View Page 6 of 7 EARTHWEAR CLOTHIERS Planning Materiality December 31, 2016 (In thousands) 3-7 30-03-2016 Unaudited 2016 $10,19,890 $70,154 $3,89,428 1. Benchmark Data Sales / Revenue Pre-tax income Total assets Materiality 2. Establish Planning Materiality Level Measurement Base Pre-tax income 2015 $9,50,484 $35,757 $3,29,959 $1,800 70,154 Percentage Applied* 4.5% Planning Materiality $3,157 Bases and Percentage Ranges: Profit Oriented Entities Pre-tax income 3 - 7%* 0.5 3% 0.25 Total Assets 2% * For public companies, 5% is typically the maximum. Not-for-Profit Entities 0.5 Total Revenue 3% 0.25Total Assets 2% Mutual Fund Entities Net Asset Value 3 - 5% Total Revenue Please use this template in conjunction with Willis & Adams Materiality Guidelines. The materiality factors provided are guidelines only and should be used only as an aid as you use professional judgment to determine planning materiality. 3. Justify/Support Your Level of Planning Materiality State the factors that you considered to determine the appropriate measurement base and percentage to determine planning materiality. Measurement Base: Pretax income is stable and predictable. It does not change from profit to loss from year to year Percentage: Work Paper 3-8: EARTHWEAR CLOTHIERS Allocation of Materiality: Tolerable Misstatements December 31, 2016 (In thousands) Tolerable Misstatement as % of Account Name 2015 2016 Unaudited Trial Tolerable Balance Misstatement Planning Materiality * Account Balance ** Explanation easy to verify account balance Cash and cash equivalents $ 48,978 $ 79,359 $ 794 50% 2% Large account with expected misstatements Receivables, net $ 12,875 Inventory $ 1,22,337 $ 8,643 $ 1,47,693 $ 800 50% 18% $ 2,368 75% 2% Large and complex account with misstatements expected, costly to audit routine testing for reasonableness Prepaid expenses $ 17,772 $ 15,647 http://ezto.mheducation.com/hm.tpx $ 1,565 50% 10% 5/29/2017 Assignment Print View Page 7 of 7 Deferred income tax $ 7,132 benefits Property, Plant, & $ 2,06,426 Equipment $ 10,338 $ 2,368 75% 23% $ 2,23,736 $ 1,578 50% 1% Relatively complex, estimation involved, related to Deferred Income Taxes Relatively little change from prior year, not difficult to audit accounting estimate tested with use of substantive analytical procedure Accumulated depreciation and amortization $ 85,986 $ 97,722 $ 2,368 75% 2% Amount will be impaired and therefore easy to audit Intangibles, net $ 423 $ 1,734 Lines of credit $ 11,011 $ 10,510 173 50 % 10% $ 1,578 50% 15% $ Relatively little volume, not difficult to audit via 3rd party info difficult to audit and expect difference to be found Accounts payable & $ Reserve for returns 68,399 $ 60,286 $ 2,368 75% 4% costly to audit with some variance expected Accrued liabilities & Accrued profit $ sharing 28,270 $ 33,600 $ 2,368 75% 7% easy to verify Income taxes payable & Deferred income taxes $ Common stock, 26,121 shares $ issued Donated capital $ Additional paid-in $ capital Deferred ($ compensation Accumulated other comprehensive $ income Retained earnings 18,057 $ 24,567 $ 2,368 75% 10% 261 $ 261 65 50 % 25% No change from prior year, easily verified 5,460 $ 5,460 $ 1,365 43% 25% No change from prior year, easily verified 20,740 $ 25,719 $ 1,578 50% 6% Little change from prior year, not difficult to audit 50 % 0% Not difficult to audit, examine current year vesting activity 75 % 25% 79) 3,883 $ 3,17,907 ($ $ 36) 2,173 $ 3,61,402 $ $ 0 $ 543 Not Applicable Treasury stock, 6,546 and 6,706 ($ 1,43,950) ($ 1,34,512) $ 1,578 shares at cost, respectively Total Amount of Tolerable Misstatement Allocated $25,825 To Balance Sheet Accounts $ 3,157 Planning Materiality (from work paper 3-7) Ratio of Total Tolerable Misstatement to Planning 8.2 Materiality *** Not Applicable 50% Involves some complex applications of GAAP Not Not Applicable Applicable 1% Little change from prior year, not difficult to audit rev: 09_13_2016_QC_CS-58870, 02_23_2017_QC_CS-78427 References Worksheet Learning Objective: 03-01 Understand the auditor's requirements for client acceptance and continuance. Learning Objective: 03-03 Know what is required to establish an understanding with the entity. Difficulty: 2 Medium Learning Objective: 03-02 Understand the steps that are involved in the preliminary engagement activities. Learning Objective: 03-04 Know the types of information that are included in an engagement letter. http://ezto.mheducation.com/hm.tpx 5/29/2017