Question: The auditors were planning the work on the financial statements

The auditors were planning the work on the financial statements of the Mary Short Cosmetics Company. The unaudited financial statements showed $515,000 net income after providing an allowance of 35% for income taxes. The company had no debt and no interest expense. Mary Short’s shares are traded over the counter, and investors have generally assigned a price earnings multiple of 16 to the shares. Press releases by the company have enabled analysts to estimate the income for the year at about $515,000, which was forecast by the company at the beginning of the year.
There are 750,000 shares outstanding, and the last quoted price for them was $11.
The auditors have decided that a 6% mispricing error in the shares would not cause investors to change their buying and selling decisions.
Misstatements totaling $13,000 were discovered in the previous year’s audit but were not corrected.

Required:
Calculate the materiality for the financial statements as a whole and the performance materiality the auditors might use in the current year audit, based on the income before income taxes.


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  • CreatedJanuary 09, 2015
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