Question

a junior auditor working for ab Accounting Firm is included in the audit team engaging in the audit the Financial Reports of Complicated Ltd., a listed company on AST. When evaluating audit results for assets in the audit, Alexander has set the preliminary judgment about materiality to be $67,000. He then allocated the materiality to all the asset accounts. The account balances, performance materiality and estimated overstatements in the accounts are shown below:

Account		Account balance	Performance materiality	Estimate of total overstatements
Cash		60,000	6,000	5,500
Account receivable		1,300,000	20,000	?
Inventory		2,100,000	60,000	45,000
Other assets		360,000	24,000	23,000
Total		4,090,000	110,000

Alexander has chosen a sample of $500,000 in Accounts Receivable. He tested it and uncovered $6000 in overstatement. He then checked on the individual accounts and all accounts in the total assets against the allocated performance materiality and the preliminary materiality to decide the acceptability of the financial statements.

Required:

a.         Ignoring sampling risk, what is the estimate of the total misstatement in Accounts Receivable?

b.         Why the total performance materiality is not the same as the preliminary materiality? Should they be equal?

c.        Based on the audit of the asset accounts and ignoring other accounts, are the overall financial statements acceptable?

d.         What do you believe the auditor should do in the circumstances?

Answer 1

a. Ignoring the sampling risk , the estimate of total misstatement in accounts receivable is as follows: $6000/$500000*100=1.2%

b. Preliminary Materiality is used to assess whether the financial statements as a whole are free from material misstatements. Performance materiality is a smaller percentage of Preliminary materiality, that is determined by the level of audit risk.

c. No, The overall financial statements cannot be said to be acceptable just on the basis of audit of asset accounts while ignoring other accounts. The audit of othe accounts have to be taken into consideration for reaching to a conclusion thereupon to provide an opinion on the true and fair presentation and preparation of financial statements .

d. The auditor should go through the performance materialty assigned to thee accounts and then check w.r.t to overall preliminary materialty set for all the asset accounts as well as for the other accounts in order to reduce the auditor's risk to a lower level and provide a reasonable assurace over the fair preparation and presentation of financial statements of the comapny.