Assume that the auditor has set $100,000 as materiality for misstatements affecting income and $125,000 for asset or liability misstatements that do not affect income. The auditor tests some accounts and has a great deal of confidence in the correct determination of the account balance. For other accounts, such as estimates, the auditor has a best estimate and a range in which he or she believes the correct amount exists. The following information is available upon completion of the audit:

Auditors often deal with uncertainty-including uncertainty about the correct amount of an account balance. The uncertainty occurs because
(a) The auditor uses sampling and
(b) Some estimates are imprecise.

Required
a. How should the auditor deal with uncertainty when making materiality judgments regarding account balances and the company's financial statements? For example, should the auditor use the best estimate or the upper or lower limit of the estimated range in determining whether an account balance is materially misstated? Explain.
b. How much is net income misstated for this year? Is the amount of misstatement considered material? Explain.
c. What is the minimum amount of adjustment that needs to be made this year in order for the financial statements to not be materially misstated? Explain.
d. What adjustments do you recommend making to the current year's financial statements? Prepare a list of adjustments.
e. What is the rationale for not booking immaterial adjustments? Do you agree with the rationale?
f. An estimate is an estimate; that is, it is not a precise answer. Assume that management is absolutely convinced that its estimates are correct and the auditor's estimates are incorrect. What options are open to the auditor regarding the account balance? Could the auditor give an unqualified opinion on the financial statements because the financial statements are management's statements and management is convinced that they arecorrect?

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This Year Balance Auditor Estimated Balance Last Year Unadjusted Misstatement $1.2 million $1.15 Range: 1.0-1.25 100,000 1.95 million Range: 1.92-1.98 Accounts Receivable $80,000 over Prepaid Insurance Prepaid Revenue 120,000 1.8 million 5,000 under 90,000 over