Question

Swell Computers is a public company that manufactures desktop and laptop computers. The components of the financial statements are: (1) income before taxes = $500,000, (2) total assets = $2.4 billion, and (3) total revenues = $7 billion. Swell Computers' CPA firm might use the lowest percentage for total assets for determining overall materiality, but they also consider qualitative factors.

a. Determine overall materiality and tolerable misstatement. Justify your decisions.

b. During the course of the audit, Swell’s CPA firm detected two misstatements that aggregated to an overstatement of income of $1 million. Evaluate the audit findings. Justify your decisions.

Answer 1

a) materiality :

Income before tax = $500,000× 5% = $ 25,000

Total asset = $2.4 b × 1% = 24m

Total revenue = $ 7 b × 0.5% = $35 m

Tolerable misstatement is a amount set by considering the population testing

Ie , income in this situation.

S tolerable musstatement can be set below overal materiality of 25,000.

So it will be 4 % × $500,000 = 20,000.

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B) income balance of $1 million is highly material becuase our material is set as 25,000 and 20,0000.

so , misstatement should be adjusted in financial statement other wise auditor will issue modified report with adverse opinion.