You are the audit manager for Ken-Ron Enterprises. Your firm has been the entity’s auditor for 15 years. Your firm normally uses a range of 3% to 5% of income before taxes to calculate overall materiality and 50-75% of overall materiality to calculate tolerable misstatement. Ken-Ron has reported the following financial statement data (in millions) for the last four years: (Data shown in image) Required: a. If you planned on using income before taxes as the benchmark to compute overall materiality and tolerable misstatement, how would you compute those amounts for 2018? Prepare and justify your calculations. b. Determine overall materiality and tolerable misstatement using either total assets or total revenues as the benchmark. Make the calculations
You are the audit manager for Ken-Ron Enterprises. Your firm has been the entity’s auditor for 15 years. Your firm normally uses a range of 3% to 5% of income before taxes to calculate overall materiality and 50-75% of overall materiality to calculate tolerable misstatement. Ken-Ron has reported the following financial statement data (in millions) for the last four years: (Data shown in image)
Required:
a. If you planned on using income before taxes as the benchmark to compute overall materiality and tolerable misstatement, how would you compute those amounts for 2018? Prepare and justify your calculations.
b. Determine overall materiality and tolerable misstatement using either total assets or total revenues as the benchmark. Make the calculations by utilizing both .25% and 2%, the endpoints of the range that your firm’s guidance provides.
c. Assume that during the course of the 2018 audit you discovered misstatements totaling $50 million (approximately 50% of the 2018 income before taxes of $105 million). Discuss whether this amount of misstatement is material given your benchmark calculations from parts a. and b. above.
Materiality is a concept that discusses why and how certain issues are relevant to a company or industry. A large issue can have a significant impact on a company's financial, economic, reputational, and legal aspects, as well as its system of internal and external stakeholders. Materiality in accounting refers to the impact of an omission or misstatement of information in a company's financial statements on the user of those statements. The item is deemed important if it is likely that users of the financial statements would have modified their behavior if the information had not been omitted or misrepresented. It is judged unimportant if the omission or falsehood has no effect on the users' activities.
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