Auditing Chapter 9
Jessica Schmitt
Auditing
Chapter 9, problem 9-28
A. Since there are no specific materiality guidelines, it is the auditor’s professional judgment that must be used to determine the appropriate preliminary estimates of materiality. I used the guidelines listed on pg 251 in figure 9-2:
Statement
Percent Guideline
Dollar Range (in thousands)
Earnings from continuing operations before taxes
3-6 %
$12,500-$25,100 (rounded)
Current Assets
3-6 %
$67,600-$135,200 (rounded)
Current Liabilities
3-6 %
$36,500-$72,900 (rounded)
Total Assets
1-3 %
$38,600-$115,800 (rounded)
B. There are a few different ways to allocate materiality, but I would choose to allocate the same amount to each balance sheet account on the consolidated statement of financial position, and I would use the materiality limit of $12,500 since it is the most restrictive.
C. Most auditors use before-tax net earnings instead of after-tax net earnings because auditors will usually project total misstatements on a pre-tax basis across the segments and then compute the tax effect of an aggregate basis to determine after tax net earning effects.
D. Allocating 75% of the preliminary judgment to accounts receivable, accounts payable and inventories affects the evidence accumulation on the audit by possibly making it less of an effort to accumulate sufficient evidence. There would also be less materiality allocated to all the other accounts.
E. First it would be necessary to reevaluate the preliminary judgment, and then if there were no changes necessary, an adjusting entry or an expansion of some audit tests would be required.
Auditing
Chapter 9, problem 9-28
A. Since there are no specific materiality guidelines, it is the auditor’s professional judgment that must be used to determine the appropriate preliminary estimates of materiality. I used the guidelines listed on pg 251 in figure 9-2:
Statement
Percent Guideline
Dollar Range (in thousands)
Earnings from continuing operations before taxes
3-6 %
$12,500-$25,100 (rounded)
Current Assets
3-6 %
$67,600-$135,200 (rounded)
Current Liabilities
3-6 %
$36,500-$72,900 (rounded)
Total Assets
1-3 %
$38,600-$115,800 (rounded)
B. There are a few different ways to allocate materiality, but I would choose to allocate the same amount to each balance sheet account on the consolidated statement of financial position, and I would use the materiality limit of $12,500 since it is the most restrictive.
C. Most auditors use before-tax net earnings instead of after-tax net earnings because auditors will usually project total misstatements on a pre-tax basis across the segments and then compute the tax effect of an aggregate basis to determine after tax net earning effects.
D. Allocating 75% of the preliminary judgment to accounts receivable, accounts payable and inventories affects the evidence accumulation on the audit by possibly making it less of an effort to accumulate sufficient evidence. There would also be less materiality allocated to all the other accounts.
E. First it would be necessary to reevaluate the preliminary judgment, and then if there were no changes necessary, an adjusting entry or an expansion of some audit tests would be required.