Question

Delta Investments provides a group of mutual funds for investors. The components of its financial statements are (1) income before taxes = $50 million, (2) total assets = $4.8 billion, and (3) total revenues = $900 million. Delta Investments' CPA firm uses the percentage applicable on total (net) assets for determining overall materiality. a. Determine overall materiality, and determine tolerable misstatement. Justify your decisions. • For an entity in the mutual fund industry, .5 percent of net asset value. Overall materiality= $4,800,000,000 x 0.005= 24,000,000 Tolerable misstatement= 24,000,000 x 50%= 12,000,000 b. During the course of the audit, Delta’s CPA firm detected two misstatements that aggregated to an overstatement of income of $5.75 million. Evaluate the audit findings. Justify your decisions.

Answer 1

a)Delta Investments is an asset-based entity, so it is more typical to use assets as a benchmark for determining overall materiality; therefore, I will use the total assets of 4.8 billion to help me determine the materiality of the audit. Because the total of the assets is a relatively high number, I will use 0.5% to calculate the overall materiality. By multiplying 4,800,000,000 by 5%, I find that the overall materiality is 240,000,00. To determine the tolerable misstatement, I will use 50% because that is an industry standard. By multiplying 240,000,00 by 50%, the tolerable misstatement comes out to be $120,000,00

b)The two detected misstatements are less than both tolerable misstatement and planning materiality so no adjustment to the financial statements would be necessary. However, the auditor should understand the cause of the misstatement and determine the impact of the misstatements on the auditor’s assessment of fraud and control risk. If either of the two misstatements were known misstatements, the auditor would request that the client make an adjustment. If Delta Investments is a public company, subject to Sarbanes Oxley 404 requirements; the misstatements may represent significant weaknesses in controls.