You have just been hired by a large regional CPA firm and you have been assigned to audit the inventory account of $3,000,000, which represents 30% of the assets of the company. Audit standards require the auditor to consider the combined amount of misstatement early in the audit. This is known as preliminary materiality judgment.
(a) List and discuss the three main factors that affect an auditor's preliminary judgment about materiality.
(b) Would you consider the inventory account and its impact on the balance sheet to be an important account? If during the audit, based upon your sample of inventory you determine a “Known Misstatement” of $30,000 from sampling 100 of the 1,000 part numbers, what might be your most likely misstatement? (Define known misstatement and likely misstatement and then apply this concept).