You are evaluating audit results for current assets in the audit of Piper Plumbing Ltd. You set the preliminary judgment about materiality for current assets at $12 500 for overstatements and at $20 000 for understatements. The preliminary and actual estimates are shown next.

REQUIRED
a. Justify a lower preliminary judgment about materiality for overstatements than understatements in this situation.
b. Explain why the totals of the tolerable misstatements exceed the preliminary judgments about materiality for both understatements and overstatements.
c. Explain how it is possible that three of the estimates of total misstatement have both an overstatement and an understatement.
d. Assume you are not concerned whether the estimate of misstatement exceeds tolerable misstatement for individual accounts if the total estimate is less than the preliminary judgment.
(1) Given the audit results, should you be more concerned about the existence of material overstatements or understatements at this point in the audit of Piper Plumbing?
(2) Which account or accounts would you be most concerned about in (1)? Explain.
e. Assume that the estimate of total overstatement for each account is less than tolerable misstatement, but that the total overstatement estimate exceeds the preliminary judgment about materiality.
(1) Explain why this would occur.
(2) Explain what the auditor should do.

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Tolerable misstaterment Under- statements Estimate of total misstatement Under- statements Account Over- Over- statements statements Cash Accounts receivable Inventory Prepaid expenses Total $2000 12 000 8 000 3 000 $25 000 $3 000 18 000 14 000 5 000 $40 000 $ 2000 4000 3000 2000 11 000 19 000 10 000 1000 $30 000