Problem

On pages 279-280 are statements of earnings and financial position for Wexler Industries.C...

On pages 279-280 are statements of earnings and financial position for Wexler Industries.

Consolidated Statements of Earnings Wexler Industries (in Thousands)

	For the 53 Weeks Ended	For the 52 Weeks Ended
	March 31, 2010	March 31, 2010	April 1, 2009
Revenue
Net sales	$8,351,149	$6,601,255	$5,959,587
Other income	59,675	43,186	52,418
	8,410,824	6,644,441	6,012,005
Costs and expenses Cost of sales	5,197,375	4,005,548	3,675,369
Marketing, general, and administrative expenses	2,590,080	2,119,590	1,828,169
Provision for loss on restructured operations	64,100	–	–
Interest expense	141,662	46,737	38,546
	7,993,217	6,171,875	5,542,084
Earnings from continuing operations before income taxes	417,607	472,566	469,921
Income taxes	(196,700)	(217,200)	(214,100)
Earnings from continuing operations	220,907	255,366	255,821
Provision for loss on discontinued operations, net of income taxes	(20,700)	–	–
Net earnings	$ 200,207	$ 255,366	$ 255,821

Consolidated Statements of Financial Position Wexler Industries (in Thousands)

Assets	March 30, 2011	March 31, 2010
Current assets
Cash	$ 39,683	$ 37,566
Temporary investments, including time deposits of $65,361 in 2011 and $181,589 in 2010 (at cost, which approximates market)	123,421
Receivables, less allowances of $16,808 in 2011 and $17,616 in 2010	899,752	759,001
Inventories
Finished product	680,974	550,407
Raw materials and supplies	443,175	353,795
	1,124,149	904,202
Deferred income tax benefits	9,633	10,468
Prepaid expenses	57,468	35,911
Current assets	2,254,106	2,018,787
Land, buildings, and equipment, at cost, less accumulated depreciation	1,393,902	1,004,455
Investments in affiliated companies andsundry assets	112,938	83,455
Goodwill and other intangible assets	99,791	23,145
Total	$3,860,737	$3,129,842

Liabilities and Stockholders’ Equity	March 30, 2011	March 31, 2010
Current liabilities
Notes payable	$ 280,238	$ 113,411
Current portion of long-term debt	64,594	12,336
Accounts and drafts payable	359,511	380,395
Accrued salaries, wages, and vacations	112,200	63,557
Accrued income taxes	76,479	89,151
Other accrued liabilities	321,871	269,672
Current liabilities	1,214,893	928,522
Long-term debt	730,987	390,687
Other noncurrent liabilities	146,687	80,586
Deferred income taxes	142,344	119,715
Stockholders’ equity
Common stock issued, 51,017,755 sharesin 2011 and 50,992,410 in 2010	51,018	50,992
Additional paid-in capital	149,177	148,584
Cumulative foreign currency translation adjustment	(76,572)	–
Retained earnings	1,554,170	1,462,723
Common stock held in treasury, at cost, 1,566,598 shares	(51,967)	(51,967)
Stockholders’ equity	1,625,826	1,610,332
Total	$3,860,737	$3,129,842

Required

a. Use professional judgment in deciding on the preliminary judgment about materiality for earnings, current assets, current liabilities, and total assets. Your conclusions should be stated in terms of percents and dollars.
b. Assume that you define materiality for this audit as a combined misstatement of earnings from continuing operations before income taxes of 5%. Also assume that you believe there is an equal likelihood of a misstatement of every account in the financial statements, and each misstatement is likely to result in an overstatement of earnings. Allocate materiality to these financial statements as you consider appropriate.
c. As discussed in part b, net earnings from continuing operations before income taxes was used as a base for calculating materiality for the Wexler Industries audit. Discuss why most auditors use before-tax net earnings instead of after-tax net earnings when calculating materiality based on the income statement.
d. Now, assume that you have decided to allocate 75% of your preliminary judgment to accounts receivable, inventories, and accounts payable because you believe all other accounts have a low inherent and control risk. How does this affect evidence accumulation on the audit?
e. Assume that you complete the audit and conclude that your preliminary judgment about materiality for current assets, current liabilities, and total assets has been met. The actual estimate of misstatements in earnings exceeds your preliminary judgment. What should you do?