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(Materiality, Evaluation of Misstatements) You are the audit manager on your firm's audit of Zulu Corporation (the Company) as of and for the year ended December 31, 2022. The Company, which is engaged in electrical construction prepares its financial statements on the basis of US GAAP. This is the initial year of the Company's existence as it was formed and commenced operations on January 1,2022 . It is also your firm' initial audit of the Company. The Company's final, adjusted trial balance for 2022 is as follows. Additional Information - The Company was formed when two brothers, Sam, and Barry Johnson, acquired al 10,000 shares of the Company's common stock ( $100 par value) for a total purchase price of $2,000,000 - Immediately after formation, the Company borrowed, on a long-term basis, $2,000,000 from a local bank - A combination of the Company's cash from the sale of its common stock and the money borrowed from the local bank was used to acquire all of the outstanding stock of Hardy Electrical Construction. The purchase was accounted for using the purchase method of accounting. - During the planning portion of your 2022 audit of the Company's financial statements, financial statement materiality was established at 5% of the Company's 2022 pretax income. - During your audit, two uncorrected misstatements were identified. In addition, one uncorrected misstatement was brought to the audit team's attention by the Company's CFO. A summary of the uncorrected misstatements (all of which management has indicated they do not want to correct) are as follows \begin{tabular}{|l|r|} \hline Failure to accrue administrative (non job related) unpaid payroll & 30,000 \\ \hline Failure to accrue interest on the Company's long-term debt & 25,000 \\ \hline An unrecorded (non job related) account payable * & 26,000 \\ \hline & \\ \hline Brought to the audit team's attention by the Company CFO & \\ \hline \end{tabular} Required 1. Calculate financial statement materiality based upon 5% of the Company's 2022 pretax earnings based solely on the final adjusted trial balance previously presented. 2. Complete a summary of the identified and unrecorded misstatements using the firm's practice aid which is set forth below. Pretax income Equity Working capita Amounts per trial balance Misstatements Increase (decrease) (Insert item description) Adjusted amounts 3. Calculate the Company's tangible net worth as of 12.31 .22 , based upon the final adjusted trial balance presented above, without regard to any possible adjustment based on the misstatements identified in item 2 above
