KKP1 ( KUIS 9 )
- Imagine that you are employed as an auditor in a CPA firm that performs the audit of Microsoft. Your firm’s materiality guidelines indicate that overall engagement materiality should be set at an amount between five and ten percent of income before taxes.
a. Apply your firm’s guidelines to Microsoft’s 2003 financial statements. What percentage of income before taxes do you believe is appropriate? Why? What do you believe overall engagement materiality should have been for 2003?
b. Given Microsoft’s 2003 balance sheet, what asset line items would be allocated the highest amount of tolerable misstatement? Why?
a. the amount of income before taxes in 2003 is 14.726 .
first we have to determine the Planning Materiality (PM) . PM is usually determined by the auditors before the audit process in the field be done. Well, PM can be determined from the Total Revenue or Total Assets. Usually suggested range for revenue is 0.5% to 1%. As for assets ranging from 1% to 5 %. Between Revenue and Total Assets, simply use one of them, so do not need both. Revenue usually is more often used as a reference in the PM. On condition that the comparative revenue between the current year with previous years did not experience a decrease or increase significantly. If the revenue is volatile, it is usually used total assets after determined the PM we need to determine the PAJE scope, PAJE scope is the minimum amount that auditor can tolerance if there was a misstatement in financial report during the audit field, PAJE scope is usually between 2% from the PM.. In this case the amount of EBT is increasing significantly from 2002 to 2003, we need to be skeptic with this situation perhaps there’s a manipulation but we don’t have any prove yet. So we need to investigate it, at first we need to determine the materiality that can be accepted/ misstatement that can be tolerance by the auditor, the materiality for EBT in 2003 is 1%-5% because there is a significant increasing in 2003. Another reason why the material is between 1%-5% because we can do audit field by using software so that auditor can have more prove in doing audit.
b. cash and equivalent 6,438, account receivable 5,196, equity and other investment 13,692,common stock 35,344. Because their amount are material and have a big impact to the fairness of the whole financial statement.