Question

You are auditing Jennings Corporation and their pre-tax income is $25,000,000. The
general guidelines for determining materiality used by your CPA firm are:
Planning materiality: 5% of pre-tax income
Tolerable misstatement: 30% of planning materiality
During the audit the following misstatements are discovered:
Inventory : #320,000
Accounts Receivables: $295,000
Fixed assets: $330,000

Revenue: $365,000
Required:
Determine Planning materiality:

Determine Tolerable misstatement:

Evaluate your audit findings and state your conclusion and/or recommendation

Answer 1

The planning materiality is 5% of pre tax income i.e. 5%of $25,000,000 i.e $1250000.

The tolerable misstatement is 30% of planning materiality i.e. 30% of $1250000=$375000.

There are missatements in the accounts in inventory, fixed assets , receivables and revenue which are within the tolerable misstatement threshold individually. However, on a combined level they amoount to $1310000. The auditor's should look at the mistatement as a whole because even pre tax income based on which planned materiality and tolerbale misstatement is determined is a combination of all these sources and giv e a comment in the audit report accordingly.