You are evaluating audit results for current assets in the audit of Quicky Plumbing Co. You set the preliminary judgment about materiality for current assets at $15,000 for overstatements and at $22,500 for understatements. The preliminary and actual estimates are shown next.
Tolerable Misstatement | Estimate of Total Misstatement | |||
Account | Over statements | Under statements | Over statements | Under statements |
Cash | $ 2,000 | $ 3,000 | $ 1,000 | $ 0 |
Accounts receivable | 10,000 | 15,000 | 9,000 | 8,000 |
Inventory | 15,000 | 22,000 | 14,000 | 5,000 |
Prepaid expenses | 3,000 | 5,000 | 2,000 | 1,000 |
Total | $ 30,000 | $ 45,000 | $ 26,000 | $ 14,000 |
Required
a. Justify a lower preliminary judgment about materiality for overstatements than understatements in this situation.
b. Explain why the totals of the tolerable misstatements exceed the preliminary judgments about materiality for both understatements and overstatements.
c. Explain how it is possible that three of the estimates of total misstatement have both an overstatement and an understatement.
d. Assume that you are not concerned whether the estimate of misstatement exceeds tolerable misstatement for individual accounts if the total estimate is less than the preliminary judgment.
(1) Given the audit results, should you be more concerned about the existence of material overstatements or understatements at this point in the audit of Quicky Plumbing Co.?
(2) Which account or accounts will you be most concerned about in (1)? Explain.
e. Explain why the estimate of total overstatement amount for each account is less than tolerable misstatement, but that the total overstatement estimate exceeds the preliminary judgment of materiality.
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