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.
Assume further that the auditor's firm provides guidance that tolerable misstatement will be set 50% of planning materiality.
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 = $775 million. Murphy & Johnson uses maximum percentage applicable on net income for determining planning materiality.
a. Determine planning materiality, and tolerable misstatement. Justify your decisions. (Enter your answers in millions, not thousands, of dollars. Round your answers to 3 decimal places. Omit the "$" sign in your response.)
During the course of the audit, Murphy & Johnson's CPA firm detected two misstatements that aggregated to an overstatement of net income of $1.25 million.
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 = $900 million. Murphy & Johnson uses maximum percentage applicable on total assets for determining planning materiality.
a. Determine planning materiality, and tolerable misstatement. Justify your decisions. (Enter your answers in millions, not thousands, of dollars. Round your answers to 2 decimal places. Omit the "$" sign in your response.)
During 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. 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 = $7 billion. Swell Computers uses total assets for determining planning materiality.
a. Determine planning materiality and tolerable misstatement. Justify your decisions. (Enter your answers in millions, not thousands, of dollars. Round your answers to 1 decimal place. Omit the "$" sign in your response.)
During 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. Evaluate the audit findings. Justify your decisions.