The following are statements of earnings and financial position for Wexler Industries. Consolidated Statements of Earnings Wexler Industries (in thousands) For 53 wks ended For the 52 wks ended March 30, 2009 March 31, 2008 April 1, 2007 Revenue Net Sales $8,351,149 $6,601,255 $5,959,587 Other Income 59,675 43,186 52,418 Total Revenue 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, Admin Expense 2,590,080 2,119,590 1,828,169 Provision for loss on Restructured Operations 64,100 -0- -0- Interest Expense 141,662 46,737 38,546 Total COGS 7,993,217 6,171,875 5,542,080 Earnings from continuing operations before income tax 417,607 472,566 469,921 Income Taxes (196,700) (217,200) (214,100) Earnings from continuing operations 220,907 255,366 255,821 Provision for loss on discontinued operations, net of income taxes (20,700) -0- -0- Consolidated Statements of Financial Position Wexler Industries (in Thousands) Assets March 30, 2009 March 31, 2008 Current Assets Cash $39,683 $37,566 Temporary investments, including time deposits of $65,361 in 2009 and $181,589 in 2008 (at cost) 123,421 271,639 Receivables, less allowances of $16,808 in 2009 and $17,616 in 2008 899,752 759,001 Inventories Finished product 680,974 550,407 Raw Materials and supplies 443,175 353,795 Total 1,124,149 904,202 Deferred Income Tax Benefits 9,633 10,468 Prepaid Expenses 57,468 35,911 Current Assets 2,254,106 2,018,787 Land, Bldgs, and Equip, at cost less A/D 1,393,902 1,004,455 Investments in affiliated companies and sundry assets 112,938 83,455 Goodwill and other intangible assets 99,791 23,145 Total 3,860,737 3,129,842 Liabilities and Stockholders Equity March 30, 2009 March 31, 2008 Current Liabilities Notes Payable $280,238 $113,411 Current Portion of long-term debt 64,594 12,336 Accounts and drafts payable 359,511 380,395 Accrued salaries, wages, and vacation 112,200 63,557 Accrued income taxes 76,479 89,151 Other accrued liabilities 321,871 269,672 Current Liabilities 1,214,893 928,522 Long-Term Debt 730,987 390,687 Other noncurrent liabilities 146,687 80,586 Deferred income taxes 142,344 119,715 Stockholders equity Common stock issued, 51,017,755 shrs in 2009 and 50,992,410 in 2008 51,018 50,992 Additional paid in capital 149,177 148,584 Cummulative foreign currency translation adjustment (76,572) -0- Retained earnings 1,554,170 1,462,723 Common stock held in treasure, at cost, 1,566,598 shrs (51,967) (51,967) Stockholders Equity 1,625,826 1,610,332 Total $3,860,737 $3,129,842 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 Wexler 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 misstatement in earnings exceeds your preliminary judgment. What should you do