On the following pages are statements of income and financial position for Nuqul Industries.

Required

a. Use professional judgment in deciding on the preliminary judgment about materiality for earnings, current assets, current liabilities, and total assets. Your conclusions should be stated in terms of percents and dollars.

b. Assume that you define materiality for this audit as a combined misstatement of earnings from continuing operations before income taxes of 5%. Also assume that you believe there is an equal likelihood of a misstatement of every account in the financial statements, and each misstatement is likely to result in an overstatement of earnings. Allocate materiality to these financial statements as you consider appropriate.

c. As discussed in part b, net earnings from continuing operations before income taxes was used as a base for calculating materiality for the Nuqul Industries audit. Discuss why most auditors use before-tax net earnings instead of after-tax net earnings when calculating materiality based on the income statement.

d. Now, assume that you have decided to allocate 75% of your preliminary judgment to accounts receivable, inventories, and accounts payable because you believe all other accounts have a low inherent and control risk. How does this affect evidence accumulation on the audit?

e. Assume that you complete the audit and conclude that your preliminary judgment about materiality for current assets, current liabilities, and total assets has been met. The actual estimate of misstatements in earnings exceeds your preliminary judgment. What should you do?

Consolidated Statements of Income Nuqul Industries (in Thousands)

	For the 53 Weeks Ended		For the 52 Weeks Ended
	March 30, 2021		March 31, 2020		April 1, 2019

Revenue
Net sales	$8,351,149		$6,601,255		$5,959,587
Other income	59,675		43,186		52,418
	8,410,824		6,644,441		6,012,005
Costs and expenses
Cost of sales	5,197,375		4,005,548		3,675,369
Marketing, general, and administrative expenses	2,590,080		2,119,590		1,828,169
Provision for loss on restructured operations	64,100
Interest expense	141,662		46,737		38,546
	7,993,217		6,171,875		5,542,084
Income from continuing operations before income taxes	417,607		472,566		469,921
Income taxes	(196,700)		(217,200)		(214,100)
Income from continuing operations	220,907		255,366		255,821