(TCO H) You have just been hired by a Large Regional CPA firm and you have been
ID: 2755938 • Letter: #
Question
(TCO H) You have just been hired by a Large Regional CPA firm and you have been assigned to audit the Inventory account of $3,000,000 which represents 30% of the assets of the company. Audit standards require the auditor to consider the combined amount of misstatement early in the audit. This is known as preliminary materiality judgment. (a) List and discuss the three main factors that affect an auditor's preliminary judgment about materiality. (b) Would you consider the inventory account and its impact on the Balance Sheet to be an important account? If during the audit, based upon your sample of inventory you determine a “Known Misstatement” of $30,000 from sampling 100 of the 1,000 part numbers, what might be your “Most likely misstatement”. (define known misstatement and likely misstatement and then apply this concept).Auditing and Assurance services.
Explanation / Answer
Numerous elements have an effect on the initial judgment approximately materiality and are as follows:
As materiality is relative in preference to absolute, it is essential to have bases for organising whether misstatements are fabric. as an instance, within the audit of a production employer, the auditor would possibly use as bases: internet income before taxes, general property, modern property, and operating capital. For a governmental unit, which includes a faculty district, there's no internet income earlier than taxes, and consequently that would be an unavailable base. rather, the number one bases could possibly be fund balances, total assets, and perhaps general revenue.
An estimate of the total misstatement in a phase is the estimate of the whole misstatements based totally upon the pattern results. If simplest a pattern of the populace is selected and audited, the auditor need to task the entire sample misstatements to a complete estimate. that is finished audit vicinity through audit place. The misstatements in every audit vicinity ought to be totaled to make an estimate of the whole misstatements in the average monetary statements. it's miles vital to make those estimates so the auditor can compare whether the economic statements, taken as an entire, can be materially misstated. The estimate for each section is as compared to tolerable misstatement for that segment and the estimate of the overall misstatement on the monetary statements is as compared to the initial judgment approximately materiality.
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