333
LO 3-1,
312
For each of the following scenarios, perform the three steps in the materiality process: (1) determine overall materiality, (2)
determine tolerable misstatement, and (3) evaluate the audit findings
Scenario 1:
Murphy & Johnson is a privately owned manufacturer of small motors for lawnmowers, tractors, and snowmobiles. The
components of its financial statements are (1) income before taxes = $21 million, (2) total assets = $550 million, and (3)
total revenues = $775 million.
a. Determine overall materiality, and determine tolerable misstatement. Justify your decisions.
. During the course of the audit, Murphy & Johnson's CPA firm detected two misstatements that aggregated to
an overstatement of income of $1.25 million. 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
efore taxes = $40 million, (2) total assets = $4.3 billion, and (3) total revenues = $900 million.
a. Determine overall materiality. and determine tolerable misstatement. Justify your decisions.
. During the course of the audit, Delta's CPA firm detected two misstatements that aggregated to an
overstatement of income of $5.75 million. Evaluate the audit findings. Justify your decisions.
Scenario 3:
Swell Computers is a public company that manufactures desktop and laptop computers. The components of the financial
statements are (1) income before taxes = $500, XXXXXXXXXXtotal assets = $2.2 billion, and (3) total revenues = $7 billion
a. Determine overall materiality and tolerable misstatement. Ju
your decisions.
. During the course of the audit, Swell's CPA firm detected one misstatement that resulted in an overstatement
of income by $1.5 million. Evaluate the audit findings. Justify your decisions.
Scenario 4:
Emma’s Designs is a for-profit clothing manufacturer. The components of its financial statements are (1) income before
taxes = $3.5 million, (2) total assets = $33 million, and (3) total revenues = $95 million. Emma’s Designs is considered a
moderate-risk audit, but Accounts Receivable is deemed to have a higher risk of misstatement.
a. Determine overall materiality and tolerable misstatement. Justify your decisions.
. During the course of the audit, Emma's CPA firm detected one misstatement in a key customer's Accounts
Receivable equal to $90,000. The firm also detected a second misstatement in Cash equal to $10,000.
Evaluate the audit findings. Justify your decisions.
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