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 net income before taxes = $21 million,total assets = $550 million, and total revenues = $775 million. Murphy & Johnson uses maximum percentage applicable on net income for determining planning materiality.Determine planning materiality, and tolerable misstatement. Justify your decisions.