During the course of auditing year-end financial statements, the auditor becomes aware of misstatements in a company's financial statements. When combined, the misstatements result in a 4% overstatement of net income and a $0.02 (4%) overstatement of earnings per share. Because no item in the financial statements is misstated by more than 5%, the auditor concludes that the deviation from the applicable financial reporting framework is immaterial and that the accounting is permissible. The auditor notes that the FASB Codification states that the provisions of the Codification need not be applied to immaterial items.
a. Based on the scenario above, may the auditor of these financial statements assume that the identified misstatements are immaterial? Why or why not?
b. What additional information might the auditor choose to analyze to determine whether or not the financial statements are misstated by a material amount?

  • CreatedSeptember 22, 2014
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