Assess the preliminary materiality based on the policy provided $($WP $1-13),$ and complete

WP $3-5,$ assuming moderate risk and satisfactory results of the analytical procedures $($your

answer should provide only one materiality measure, i$.$e$.,$ decide on the most appropriate

base, and use the most appropriate percentage$).$

WP $1-13$

ACTG $307$ & ASSOCIATES, CPAs

POLICY STATEMENT

Professional judgment is to be used at all times in setting and applying materiality guidelines. As a general

guideline, the following policies are to be applied:

The combined total of misstatements in the financial statements exceeding $10$ percent is normally

considered material, less than $5$ percent is presumed to be immaterial in the absence of qualitative

factors. Between $5$ percent and $10$ percent require the greatest amount of professional judgment to

determine their materiality.

The $5$ percent to $10$ percent must be measured in relation to the appropriate base. Many times there

is more than one base to which misstatements should be compared. The following guides are

recommended in selecting the appropriate base:

a$.$ Income statement. Combined misstatements in the income statement should ordinarily be

measured at $5$ percent to $10$ percent of operating income before taxes. A guideline of $5$ percent to $10$

percent may be inappropriate in a year in which income is unusually large or small

b$.$ Balance sheet. Combined misstatements in the balance sheet should originally be

evaluated for current assets, current liabilities, and total assets. For current assets and current liabilities,

the guidelines should be between $5$ percent and $10$ percent. For total assets, the guidelines should be

between $3$ percent and $6$ percent.

Qualitative factors should be carefully evaluated on all audits.

WP $3-5$

XYZ Corp.

Preliminary materiality Judgment