Question

Assume you are auditing a publicly held company. You have set planning materiality to be $300,000. You have set tolerable misstatement to be $150,000 for the Accounts Receivable account. You have discovered a misstatement in Accounts Receivable of $175,000. Answer the following: (a) explain whether or not you think this misstatement is material and why and (b) given whether or not you think this amount is material, what do you do about it

Answer 1

A misstatement in the financial statement is material when the amount is more than the tolerable misstatement statement.

Therefore in this case tolerable misstatement limit is $150,000 and actual misstatement in account receivable is $175,000 therefore as the actual misstatement is more than the tolerable limit, misstatement is material.

B)

As and when the material misstatement in the financial statement is discovered by the auditor it is the responsibility of the auditor to report such misstatement to the management and if the misstatement can be rectified it should be rectified in the given current period and should be clearly mentioned in the audit report for the sake of shareholders. Also the auditor should advise the management such ways so that such misstatement can be prevented in the future.

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