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Chat 6 Solutions (CH6)

# Chat 6 Solutions (CH6) - Chat 6 Solutions 6-29 There can be...

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Chat 6 Solutions 6-29 There can be a variety of estimates, but those suggested in the text include: (a) (b) Franklin Co. Tyler Co. Rules of Thumb: 5 percent of net income before taxes \$ 80,000 \$ 4,500 10 percent of net income before taxes 160,000 9,000 1/2 percent of total assets 174,500 13,500 1 percent of total assets 349,000 27,000 1/2 percent of total revenues 148,000 22,500 1 percent of total revenues 296,000 45,000 1 percent of total equity 138,000 10,000 Sliding scale illustration 193,337 48,350 If the auditors use the rule of thumb guidelines they will usually use the amounts for any rule (e.g., 5 versus 10 percent of sales) in such a manner as to function as a sliding scale in which the materiality measure increases at less than a pro-rata amount as entity size increases. For Franklin Co. (the larger company), the auditors would probably consider the following measures as being relevant: 5 percent of net income before taxes \$ 80,000 1/2 percent of total assets 174,500 1/2 percent of total revenues 148,000 Therefore, between \$80,000 and \$174,500 would be a reasonable range for materiality for the Company. For Tyler Co. (a very small company), the auditors would probably use the higher percentage of the rules of thumb. Also, they would probably not use the net income or equity measures because the company's income is too low. Therefore the following measures would probably be considered relevant: 1 percent of total assets \$27,000 1 percent of total revenues \$45,000 (c)

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