Use professional judgment in deciding on the preliminary judgment about materiality for profit, current assets, current liabilities and total assets. Your conclusions should be stated in terms of percentages and dollars.

Assume that you define materiality for this audit as a combined misstatement of operating profit before income tax of 10%. Also assume that you believe there is an equal likelihood of a misstatement of every account in the financial statements and that each misstatement is likely to result in an overstatement of profit. Allocate materiality to these financial statements as you consider appropriate.

Now, assume you have decided to allocate 75% of your preliminary judgment to accounts receivable, inventories and accounts payable because you believe all other accounts have a low inherent and control risk. How does this affect evidence accumulation on the audit?

Assume you complete the audit and conclude that your preliminary judgment about materiality for current assets, current liabilities and shareholders? equity has been met. The actual estimate of errors in profit exceeds your preliminary judgment. What should you do?