Question
Question = For each of the following scenarios, perform the three steps in the materiality process: (1) determine planning materiality, (2) determine tolerable misstatement, and
Question = For each of the following scenarios, perform the three steps in the materiality process: (1) determine planning materiality, (2) determine tolerable misstatement, and (3) evaluate the audit findings. (SHOW WORK) |
Scenario 1: |
Murphy & Johnson is a manufacturer of small motors for lawnmowers, tractors, and snowmobiles. The components of its financial statements are (1) net income before taxes = $21 million, (2) total assets = $550 million, and (3) total revenues = $775 million. Murphy & Johnson uses maximum percentage applicable on net income for determining planning materiality. |
a. | Determine planning materiality, and tolerable misstatement. Justify your decisions. During the course of the audit, Murphy & Johnsons CPA firm detected two misstatements that aggregated to an overstatement of net income of $1.25 million. |
Planning materiality | $ |
Tolerable misstatement | $ |
b. | Evaluate the audit findings. Justify your decisions. |
Scenario 2: |
Delta Investments provides a group of mutual funds for investors. The components of its financial statements are (1) net income before taxes = $40 million, (2) total assets = $4.3 billion, and (3) total revenues = $900 million. Murphy & Johnson uses maximum percentage applicable on total assets for determining planning materiality. |
a. | Determine planning materiality, and tolerable misstatement. Justify your decisions. During the course of the audit, Deltas CPA firm detected two misstatements that aggregated to an overstatement of net income of $5.75 million. |
Planning materiality | $ |
Tolerable misstatement | $ |
b. | Evaluate the audit findings. Justify your decisions. |
Scenario 3: |
Swell Computers manufactures desktop and laptop computers. The components of the financial statements are: (1) net income before taxes $500,000, (2) total assets = $2.2 billion, and (3) total revenues = $7 billion. Swell Computers uses total assets for determining planning materiality. |
a. | Determine planning materiality and tolerable misstatement. Justify your decisions.
|
Planning materiality | $ |
Tolerable misstatement | $ |
b. | Evaluate the audit findings. Justify your decisions. |
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