Suppose that you are the auditor of a major retall client who has reported the following Income before taxes (1BT) for the first two
‘quarters of the year: 15t quarter = $1,200,000 and 2nd quarter = $1500.000. You are In the process of establishing overall materiainy
forthe client. Based on pror years,the client has a 10 percent deciine In IBT from the 2nd quarter to the 3rd quarter. You also know
that T I the 4th quarter Increases by 25 percent over the 3rd quarter.
Required:
Determine the amount of overall materfality for the audit based on these preliminary amounts.
Note: Round your answer to the nearest thousand value.
|Amount of overall mateiaty s 25700Q
Explanation
“To determine overall matertaity based on the information provided the audhor would make the following caiculation for the fullyear Income before
tares:
Incose before
Quarters taes
10 51,200,000
2 1,500,000
3 1,350,000 = 1,500,000 x 2,90
“Q 1,687,500 = 1,350,000 x 1.25
Estinated incone before taxes $5,727,500
Using 5% a a benchmark, overall materalty based on the estimated Income before taxes would be $287.000 (rounded)
, Required Information
Errors versus Fraud
[ s ) Misstatements can be of two types. The first-an error-is deemed to be unintentional. The second type-fraud-is deemed
10 be an Intentional act.
] Audtors have the responsibilty to plan and perform an audt to obtain reasonable assurance about whether the financial
Book statements are free of material misstatement. Misstatements are classified as elther unintentional (efror) or Intentional
(fraud).
Roll your cursor over each action and, basedon the hint given, choose whether
it is an error of fraud.
Enmor Fraud
‘ Mistake in gathering Misappropriaton of
data, assels,
Unreasonable.
estimates from | Frauauient financial
misinterpretation of reporting
facts
‘quarters of the year: 15t quarter = $1,200,000 and 2nd quarter = $1500.000. You are In the process of establishing overall materiainy
forthe client. Based on pror years,the client has a 10 percent deciine In IBT from the 2nd quarter to the 3rd quarter. You also know
that T I the 4th quarter Increases by 25 percent over the 3rd quarter.
Required:
Determine the amount of overall materfality for the audit based on these preliminary amounts.
Note: Round your answer to the nearest thousand value.
|Amount of overall mateiaty s 25700Q
Explanation
“To determine overall matertaity based on the information provided the audhor would make the following caiculation for the fullyear Income before
tares:
Incose before
Quarters taes
10 51,200,000
2 1,500,000
3 1,350,000 = 1,500,000 x 2,90
“Q 1,687,500 = 1,350,000 x 1.25
Estinated incone before taxes $5,727,500
Using 5% a a benchmark, overall materalty based on the estimated Income before taxes would be $287.000 (rounded)
, Required Information
Errors versus Fraud
[ s ) Misstatements can be of two types. The first-an error-is deemed to be unintentional. The second type-fraud-is deemed
10 be an Intentional act.
] Audtors have the responsibilty to plan and perform an audt to obtain reasonable assurance about whether the financial
Book statements are free of material misstatement. Misstatements are classified as elther unintentional (efror) or Intentional
(fraud).
Roll your cursor over each action and, basedon the hint given, choose whether
it is an error of fraud.
Enmor Fraud
‘ Mistake in gathering Misappropriaton of
data, assels,
Unreasonable.
estimates from | Frauauient financial
misinterpretation of reporting
facts
