Dolman, CPA, is developing the preliminary materiality number to be used in the audit of Abacus Inc., a nonissuer. Which of the following will Dolman most likely use in developing this number?
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Pictures for Less has engaged Devinson CPAs to audit their complete set of financial statements for the year ended December 31, Year 2. As a manager, you are helping your senior staff, John Jacobs, fill out a materiality worksheet for Pictures for Less. You have referred him to review Devinson CPAs' manual on materiality, which is included in the "Devinson Manual" tab. In addition, you have reviewed the planning workpapers, which documented the knowledge of the client's business and noted the following items/notes: - Low likelihood that there will be uncorrected or undetected misstatements - Interim revenue as of 06/30/Year 2 is $2,550,000 - Total assets as of 06/30/Year 2 are $4,900,000 For benchmark factor utilized, these are the possible answers (Gross Profit, Profit before tax, total assets, total equity, total expenses, total revenue). For the preliminary planning materiality and tolerable misstatement cells, input the correct dollar amount. Client Name: Pictures for Less Prepared by: John Jacobs Date Prepared: September 20, Year 2 Benchmark Factor Utilized: Preliminary Planning Materiality: Tolerable Misstatement: Devinson CPAs' Materiality Guidelines: 1. Materiality should be based on either total assets or total revenue, whichever is lower. 1a. If annual revenue is not available, then the auditor should annualize revenue. 2. Materiality is calculated by taking the benchmark amount and multiplying it by the appropriate materiality percentage as shown in the Materiality Table below. Materiality should be rounded down to two significant digits. 3. Tolerable misstatement is calculated by multiplying the rounded materiality for the financial statements as a whole by either 60% (for low likelihood of uncorrected and undetected misstatements) or 70% (for high likelihood of uncorrected and undetected misstatement). Tolerable misstatement should be rounded down to two significant digits. Materiality Table: Base Amount Materiality Percentage $0-$150,000 4.00% $150,001-$450,000 2.00% $450,001-$1,000,000 1.00% $1,000,001-$3,000,000 0.80% $3,000,001-$5,500,000 0.60% $5,500,001+ 0.50%
Breanna O.
I need help estimating the dollar amount of potential misstatements for an assignment. It is pretty long, so I will just post what I think is needed. I prepared a common-size income statement for the company in Excel and found accounts I think have potential misstatements. If I have those percentages for three years, how do I calculate that potential misstatement? For example, Depreciation Expense is 3.54% of net sales with $5,336,783 in 2016. It is 3.12% in 2015 with $4,642,982. Finally, in 2014, it is 3.02% with $4,367,565. In 2016, sales are $150,918,731. Sales Returns and Allowances is $181,103. So I calculated Net Sales to be $150,737,628 for 2016. The formula for this question would be (3.54-3.12) * Total Sales of 2016, right? So this would be (3.54-3.12) * $150,737,628 = $63,309,803.76, if I am understanding correctly. However, I am still confused about why. This number seems very high for the potential misstatement when the account only has $5,336,783 in 2016. I have to estimate these for a lot of different accounts, so any help is appreciated to help me understand.
Akash M.
Atlantic Academy is a private school that offers education to children from Kindergarten to Grade 7. The school operates as a not-for-profit entity, and oversight of the school is performed by the board of directors. The board reviews the operational and financial results monthly to ensure the school is meeting its budget responsibilities. Revenues for the school generally come from three sources: student tuition, government funding, and various fundraising programs seeking additional funds for specific purposes. Government funding is provided based on the number of students enrolled, and the funds are to be spent only on the provision of education services. A requirement of government funding is that the school must submit annual audited financial statements. Jones and Black, CPAs, are the auditors of Atlantic Academy. Their firm policy is to use the following percentages when determining materiality: - 5% of normalized pre-tax profit - 1% of total assets - 2% of equity - 2% of revenues or expenditures Performance materiality is to be 65% of planning materiality. Select financial data for Atlantic Academy are provided below: 2020 Revenue: $1,186,000 Expenses: $1,607,000 Income from continuing operations: ($421,000) Total assets: $3,419,000 2019 Revenue: $1,229,000 Expenses: $1,160,000 Income from continuing operations: $69,000 Total assets: $2,928,000 Note: Several answers may be correct a) Jones and Black should use 5% of normalized pre-tax profit to establish materiality for Atlantic Academy. b) Qualitative considerations, including the needs of the users, should be considered when determining materiality. c) The users of Atlantic Academy's financial statements are concerned with the level of equity, so using 2% of equity as a basis for establishing materiality is appropriate. d) Users of the financial statements include the government, the board of directors, and students. e) The most appropriate measure for materiality is 2% of expenditures as users are concerned with the entity's spending. f) Since the government is involved, materiality should be set at zero as every error must be discovered.
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