Question: You are the audit manager for Ken-Ron Enterprises. Your firm has been the entity's auditor for 15 years Your firm normally uses a range of 3% to 5% of income before taxes to calculate overall materiality and 50- 75% of
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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.
XYZ Company has a 3-year cumulative loss position of ($20,000). XYZ Company has historically had reliable and accurate forecasts, and the engagement team has tested the Company's forecasting process. Consider the following: Gross deductible temporary differences at 12/31/CY of $250,000, related to net operating loss carryforwards that do not expire. XYZ Company entered into a significant new agreement during the year with a third party, which is expected to continue to generate a profit in future years. The engagement team has tested this agreement and its impact on management's future projections, which was deemed reasonable. Forecasted pre-tax book income of $150,000 for 12/31/CY+1. This level of income is expected for the next 5 years. The applicable tax rate is 21% for the current and future years. Which do you recommend: a full, partial, or no valuation allowance for 12/31/CY?
Sri K.
Roland Company, a retail store, has utilized your services as an independent auditor for several years. During the current year, the company opened a new store, and in the course of your annual audit, you verify the cost of the fixtures installed in the new store by examining purchase orders, invoices, and other documents. This audit brings to light an understated invoice nearly a year old in which a clerical error by the supplier, Western Showcase, Inc., caused the total of the invoice to read $28,893.62 when it should have read $82,893.62. The invoice was paid immediately upon receipt without any notice of the error, and subsequent statements and correspondence from Western Showcase, Inc., showed that the account with Roland Company had been paid in full. Assume that the amount in question is material in relation to the financial position of both companies. a. What action should you take in this situation? b. If the client should decline to take any action in the matter, would you insist that the unpaid amount of $54,000 be included in the liabilities shown on the balance sheet as a condition necessary for your issuance of an unqualified audit report? c. Assuming that you were later retained to make an audit of Western Showcase, Inc., would you utilize the information gained in your audit of Roland Company to initiate a reopening of the account with that company?
Akash M.
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