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List and discuss the three main factors that affect an auditor’s preliminary judgment about materiality.

1. You have just been hired by a Large Regional CPA firm and you have been assigned to audit the Inventory account of $3,000,000 which represents 30% of the assets of the company. Audit standards require the auditor to consider the combined amount of misstatement early in the audit. This is known as preliminary materiality judgment.

(a) List and discuss the three main factors that affect an auditor’s preliminary judgment about materiality.

(b) Would you consider the inventory account and its impact on the Balance Sheet to be an important account? If during the audit, based upon your sample of inventory you determine a “Known Misstatement” of $30,000 from sampling 100 of the 1,000 part numbers, what might be your “Most likely misstatement”. (define known misstatement and likely misstatement and then apply this concept)

2.For which of the following matters should an auditor obtain written management representations? Select one of the below situations and explain your response.

(a) Management’s cost-benefit justifications for correcting internal control weaknesses.

(b) Management’s knowledge of future plans that may affect the price of the entity’s stock.

(c) Management’s knowledge of allegations of fraud or suspected fraud affecting the entity.

(d) Management’s acknowledgment of its responsibilities for employee’s violations of laws.

3. Auditing standards define a confirmation as the “process of obtaining and evaluating a direct communication from a third party in response to a request for information about a particular item affecting financial statement assertions.” What are the two assertions for which confirmation of accounts receivable balances provides primary evidence. Select one of the below options and EXPLAIN your reasons why you selected that option.

(a) Completeness and Valuation

(b) Valuation and Rights and Obligations.

(c) Rights and obligations and existence.

(d) Existence and Completeness


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