Question :

For each of the subsequent scenarios, perform the three steps in the materiality process: (1) evaluate planning materiality, (2) evaluate tolerable misstatement, and (3) determine the audit findings.

Suppose further that the auditor's firm provides guidance that tolerable misstatement will be set 50 percent of planning materiality.

Scenario 1:

Murphy and Johnson is a manufacturer of small motors for lawnmowers, snowmobiles and tractors. 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 and Johnson use maximum percentage applicable on net income for evaluating planning materiality.

a. Evaluate planning materiality, and tolerable misstatement. Justify your decisions.

Planning materiality $ _____

Tolerable misstatement $_____

During the course of the audit, Murphy and Johnson's CPA firm detected two misstatements that aggregated to an overstatement of net income of $1.25 million.

b. Determine the audit findings. Justify your decisions.

Scenario 2:

Delta Investments gives a group of mutual funds for investors. The components of its financial statements are (1) total income before taxes = $40 million, (2) total assets = $4.3 billion, and (3) total revenues = $900 million. Murphy and Johnson use maximum percentage applicable on total assets for evaluating planning materiality.

a. Evaluate planning materiality, and tolerable misstatement. Justify your decisions.

Planning materiality $ _____

Tolerable misstatement $_____

In the course of the audit, Delta's CPA firm detected two misstatements that aggregated to an overstatement of net income of $5.75 million.

b. Determine the audit findings. Justify your decisions

Scenario 3:

Swell Computers manufactures laptop and desktop computers. The components of the financial statements are: (1) total income before taxes $500,000, (2) total assets = $2.2 billion, and (3) net revenues = $7 billion. Swell Computers uses total assets for evaluating planning materiality.

a. Determine planning materiality and tolerable misstatement. Justify your decisions.

Planning materiality $ _____

Tolerable misstatement $_____

In the course of the audit, Swell's CPA firm detected one misstatement that resulted in an overstatement of net income by $1.5 million.

b. Determine the audit findings.