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EarthWear Hands-on Mini-case Chapter 3 - Materiality and Tolerable Misstatement The McGraw-Hill Companies, Inc., 2012 INSTRUCTIONS: 1 2 Fields you are to complete on work papers are colored yellow. The color will disappear when the field is completed. 3 Fields you are to complete on work papers are colored yellow. The color will disappear when the field is completed. 4 5 In this mini-case you will determine planning materiality as well as tolerable misstatement amounts for balance sheet accounts of EarthWear Clothiers, Inc. While many auditing firms use a simple approach for establishing planning materiality and tolerable misstatement similar to the one illustrated in your textbook, some firms use more detailed guidelines that involve allocating a multiple of planning materiality to balance sheet accounts. This case illustrates one such approach. Read the Materiality Guidelines for Willis & Adams CPAs. To open the guidelines document please double-click on the following icon. A document will open in Microsoft Word. Following the Materiality Guidelines for Willis & Adams CPAs, complete all the fields on Work Paper 3-7 indicated in yellow (Work Paper 3-7 is found on the next tab of this worksheet). For your convenience, EarthWear Financial Statements have been included in worksheet tabs after the working papers. Following the Materiality Guidelines for Willis & Adams CPAs, complete all the fields on Work Paper 3-8 indicated in yellow. When completed with the work papers, enter your initials in the yellow box with title " Initial Here". Please print hard copies of work papers 3-7 and 3-8 for submission unless your instructor requests an electronic submission. The work papers are each formatted to fit on one page. Materiality Guidelines Name: Class: EARTHWEAR CLOTHIERS 3-7 Planning Materiality Initial Here December 31, 2012 4/16/2012 (In thousands) Unaudited 1. Benchmark Data 2012 2011 Sales / Revenue $1,019,890 $950,484 Expenses $572,153 $546,393 Pre-tax income $70,154 $35,757 Current assets $261,680 $209,095 Current liabilities $120,617 $116,268 Total assets $389,428 $329,959 Materiality $1,800 2. Establish Planning Materiality Level Measurement Base Select Measurement Base Using The Yellow Percentage Applied* Input a Percentage Here Based on the Guide Planning Materiality Please Complete Cells Above Bases and Percentage Ranges: Profit Oriented Entities Pre-tax income 3 - 7%* Total Revenue - 1% Current Assets or Liabilities 2 - 5% Total Assets - 1% * For public companies, 5% is typically the maximum. Not-for-Profit Entities Total Revenue - 2% Total Expenses - 2% Mutual Fund Entities Net Asset Value - 1% 3. Justify/Support Your Level of Planning Materiality Measurement Base: Enter your response here Percentage: Enter your response here Please use this template in conjunction with Willis & Adams Materiality Guidelines. The materiality factors provided are guidelines only and should be used only as an aid as you use professional judgment to ... View Full Document

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