Assume that an auditor assesses a well-calibrated RR of 25-35,000 and uses the uniform distribution to model

Question:

Assume that an auditor assesses a well-calibrated RR of 25-35,000 and uses the uniform distribution to model the AccR over the RR. The auditor judges that acceptable AccR is 0.2 in this situation.

a. Give a numerical example of a materiality that results in a nirvana accounting estimate situation for the above RR. Is your materiality a specific materiality or an overall materiality?

b. Give an example of a materiality for which there exists a benchmark range with acceptable AccR = 0.2 at least at one point, but not at all points within RR, thereby solving Cockburn's problem.

c. Give an example of a materiality that results in a nightmare accounting estimate situation.

d. What should the auditor do about an auditee company's reported estimate in its financial statements that happens to be in a nightmare situation?

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