Question

Qualitative Materiality illustration:

An audit client has the following audited and unaudited amounts on its balance sheet: Current assets $500,000 [not audited] and current liabilities $225,000 [audited]. The company has the following debt covenants: current ratio [i.e. current assets divided by current liabilities] must be 2.0 or higher; Working Capital [i.e. Current assets minus Current liabilities] must be $200,000 or higher. Since the current liabilities have already been audited, the auditor is confident that the current liabilities number is proper. What is the largest amount of materiality [tolerable misstatement] that the auditor should consider when auditing current assets? Show all considerations and calculations.

There are TWO debt covenants. Consider each separately

a. Current Ratio Considerations:

b. Working Capital considerations:

c. Final considerations: i.e. Which of two is “binding”? Explain briefly.

Answer 1