Question
Statement of Financial Position Fiscal Year 2021 2020 Cash 170 120 Accounts Receivable 5 4 PPE 3 3 Goodwill 90 90 Total Assets 268 217
Statement of Financial Position | |||||
Fiscal Year | 2021 | 2020 | |||
Cash | 170 | 120 | |||
Accounts Receivable | 5 | 4 | |||
PPE | 3 | 3 | |||
Goodwill | 90 | 90 | |||
Total Assets | 268 | 217 | |||
Accounts Payable | 70 | 50 | |||
Other Current Liabilities | 40 | 28 | |||
Total Liabilities | 110 | 78 | |||
Shareholders' Equity | 158 | 139 | |||
Statement of Comprehensive Income | |||||
Fiscal Year | 2021 | 2020 | |||
Revenue | 150 | 110 | |||
Cost of Revenue | 30 | 18 | |||
Gross Profit | 120 | 92 | |||
Research and development | 45 | 25 | |||
Selling, general, and administrative | 90 | 70 | |||
Other expenses | 15 | 18 | |||
Net income | -30 | -21 |
Guidelines to calculate materiality:
3% to 7% of net income before taxes.
1% to 3% of total assets.
3% to 5% of shareholders equity.
1% to 3% of revenue.
1% to 3% of expenses.
0.5 to 5% of gross profit.
1) Using the guidance and the financial statements above, propose and justify an assessment of the overall materiality level for the 2021 audit of this client.
2) From the elements of the case, propose and justify an assessment of inherent risk for this client (HIGH / MODERATE-HIGH / MODERATE / MODERATE -LOW / LOW) based only on identifying and assessing overall financial statement risks (in other words, you do not need to assess risk of material misstatement at the assertion level at all)
3) What is going to be the planned detection risk (HIGH / MODERATE-HIGH / MODERATE / MODERATE -LOW / LOW) and the quantity of evidence auditors will have to collect for the audit of this client?
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