Reference no: EM132860130

Question 1:

Discuss the Tolerable Misstatement situation shown below. The auditor determines materiality for the company being audited to be Thirty Thousand Dollars [$30,000]. Tolerable misstatement of Twenty Thousand dollars [$20,000] is assigned to each of the following five accounts. Unknown errors in each of the accounts are indicated below. Audit work is performed on each account as discussed in class. The client makes any corrections to accounts as suggested by the auditor. After the completion of audit work, the auditor issues an unqualified (i.e. GOOD) auditors' opinion. Was this the correct opinion? Discuss and show any applicable calculations.

Account Unknown error in account

before any audit work is done

(all accounts are overstated)

Cash $ 6,000

Accounts receivable 8,000

Prepaid Assets 18,000

Property, Plant and Equipment 25,000

Intangible Assets 35,000

Question 2: Qualitative Materiality illustration

An audit client has the following audited and unaudited amounts on its balance sheet: Current assets $600,000 [not audited] and current liabilities $275,000 [audited]. The company has the following debt covenants: current ratio [i.e. current assets divided by current liabilities] must be 2.0 or higher; Working Capital [i.e. Current assets minus Current liabilities] must be $280,000 or higher. Since the current liabilities have already been audited, the auditor is confident that the current liabilities number is proper. What would be the "qualitative" amount of materiality that the auditor should consider when auditing current assets? Show all considerations and calculations.

There are TWO debt covenants. Consider each separately

Current Ratio Considerations

Working Capital considerations

Final considerations

i.e. Which of two would be the qualitative materiality amount? Explain briefly.