10
1. ABC Wholesalers has been involved in a long-running dispute with the taxation authorities in relation to the amount of sales tax payable on certain lines of merchandise. The case was resolved this year in favour of the taxation authorities. The court ruled that ABC Wholesalers as well as paying the outstanding taxes, must pay a non-tax deductible fine of $420,000.
(a) The planning materiality level is set at $200,000 by the audit manager. The fine that must be paid is $420,000. It is known that if the amount is equal to or greater than 10% of the appropriate base amount, it is presumed to be material.
Quantitative Considerations
In order to determine whether an amount of an item is material, an evaluation can be done using the operating profit from the statement of comprehensive income.
Operating Profit after tax x 10% = $354,100 Therefore:
$420,000> $354,100 which means that materiality exists and more audit evidence is needed.
>The answer to what I saw on the net is different to mine where they divided the 420000 by 3541000 which is probably another way of doing it.
Qualitative Considerations
The auditor must consider the nature and other related matters of the items that might give rise to the risk of material misstatements. ABC Wholesalers could not accurately calculate their amounts of sales tax payable which indicates that their control methods are weak which may eventually lead to corporate fraud.
(b) In order to plan the nature, timing and extent of audit procedures, the materiality level for the financial statements as a whole needs to be expressed as a specified amount. In part (1) of the question, the planning materiality level was needed in order to assess whether the amounts used were material or not. The amount was used as a base to calculate whether the amount of tax-deductible fine was greater than 10%.
(a) The planning materiality level is set at $200,000 by the audit manager. The fine that must be paid is $420,000. It is known that if the amount is equal to or greater than 10% of the appropriate base amount, it is presumed to be material.
Quantitative Considerations
In order to determine whether an amount of an item is material, an evaluation can be done using the operating profit from the statement of comprehensive income.
Operating Profit after tax x 10% = $354,100 Therefore:
$420,000> $354,100 which means that materiality exists and more audit evidence is needed.
>The answer to what I saw on the net is different to mine where they divided the 420000 by 3541000 which is probably another way of doing it.
Qualitative Considerations
The auditor must consider the nature and other related matters of the items that might give rise to the risk of material misstatements. ABC Wholesalers could not accurately calculate their amounts of sales tax payable which indicates that their control methods are weak which may eventually lead to corporate fraud.
(b) In order to plan the nature, timing and extent of audit procedures, the materiality level for the financial statements as a whole needs to be expressed as a specified amount. In part (1) of the question, the planning materiality level was needed in order to assess whether the amounts used were material or not. The amount was used as a base to calculate whether the amount of tax-deductible fine was greater than 10%.