Assume that you define materiality for this audit as

Assume that you define materiality for this audit as a combined misstatement of earnings from
continuing operations before income taxes of 5%. Also assume that you believe there is an
equal likelihood of a misstatement of every account in the financial
statements, and each misstatement is likely to result in an overstatement of earnings.
Allocate materiality to these financial statements as you consider appropriate.
As discussed in part b, net earnings from continuing operations before income taxes was used
as a base for calculating materiality for the Wexler Industries audit. Discuss why most auditors
use before-tax net earnings instead of after-tax net earnings when calculating materiality based
on the income statement.
Now, assume that 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 accumu- lation on the audit?
Assume that you complete the audit and conclude that your preliminary judgment about
materiality for current assets, current liabilities, and total assets has been met. The actual
estimate of misstatements in earnings exceeds your preliminary judgment. What should you
do?

9-28 (Objectives 9-2, 9-3, 9-4, 9-6, 9-7, 9-8, 9-10) The following are concepts discussed in this
chapter:
Preliminary judgment about materiality 2. Control risk
Risk of fraud
Estimated total misstatement in a segment 5. Planned detection risk
Estimate of the combined misstatement 7. Acceptable audit risk
Tolerable misstatement
Inherent risk
Risk of material misstatement 11. Known misstatement
March 30, 2011
March 31, 2010
$
280,238
64,594
359,511
112,200
76,479
321,871

$ 113,411
12,336
380,395
63,557
89,151
_________
269,672
1,214,893 730,987 146,687 142,344
51,018 149,177
(76,572) 1,554,170
928,522 390,687 80,586 119,715
50,992 148,584
— 1,462,723
(51,967)

(51,967)
_________
_________
1,625,826
1,610,332
_________
_________
$3,860,737
$3,129,842
_________
_________
_________
280

a. Identify which items are audit planning decisions requiring professional judgment.
Identify which items are audit conclusions resulting from application of audit pro-
cedures and requiring professional judgment.
Under what circumstances is it acceptable to change those items in part a after the audit is
started? Which items can be changed after the audit is 95% completed?
9-29 (Objectives 9-6, 9-7) Describe what is meant by acceptable audit risk. Explain why each of
the following statements is true:
A CPA firm should attempt to achieve the same audit risk for all audit clients when
circumstances are similar.
A CPA firm should decrease acceptable audit risk for audit clients when external users rely
heavily on the statements.
A CPA firm should decrease acceptable audit risk for audit clients when there is a reasonably
high likelihood of a client filing bankruptcy.
Different CPA firms should attempt to achieve reasonably similar audit risks for clients with
similar circumstances.