Auditing and Assurance Services 9th Edition by Alvin Arens,Mark Beasley,Randy Elder

Exercise 10

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) net 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 net income of $1.25 million.
b. 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) net income before 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 net income of $5.75 million.
b. 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) net income before taxes = $500,000, (2) total assets = $2.2 billion, and (3) total revenues = $7 billion.
a. Determine overall materiality and tolerable misstatement. Justify your decisions. During the course of the audit, Swell's CPA firm detected one misstatement that resulted in an overstatement of net income by $1.5 million.
b. Evaluate the audit findings. Justify your decisions.