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Case 2 ACIS 3414 Summer 2016 CALABRO PAGING SERVICES - MATERIALITY ALLOCATION EXAMPLE Don Jones is a senior in charge of the audit of Calabro Paging...

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Calabro Paging Services

Decide on planning materiality; tolerable misstatement allocation to accounts and adjust for qualitative factors if necessary.


Case 2 ACIS 3414 Summer 2016 CALABRO PAGING SERVICES – MATERIALITY ALLOCATION EXAMPLE Don Jones is a senior in charge of the audit of Calabro Paging services. Jones’s firm, Abbott & Johnson LLP, has audited Calabro for 10 years. Calabro’s unaudited balance sheet is shown for the year ending December 31, 2015. Calabro Paging services is a business services company that uses wireless communication technology to develop solutions for businesses and organizational problems. The company owns and operates paging systems; manufactures, leases, and sells pagers; and provides paging services in 12 major metropolitan areas in southeastern US. Calabro paging services went public 10 years ago and its stock is traded on the NADAQ stock exchange. Jones assessed the internal controls and discovered that Calabro has strong control procedures in place in the revenue and purchasing processes. In recent years the company has focused on expanding its customer base and successfully done so. In the process however the company has acquired very little PP&E in the current year adding up to only $1 million. It has also extended its leasing policy from two years terms to 3 to 5 year terms. 82 percent of the company’s pagers are leased where only 18% are sold as of December 31, 2015. Jones is a little concerned with possible obsolescence of the pagers leased out. Jones has to decide on planning materiality and tolerable misstatements using the total assets as a base. To determine percentage his firm uses a table and adjusts for any qualitative factors after decision is made on the tolerable misstatements. After review of the client’s accounts Jones decided that he will test 100% of the following accounts: current debt; long-term debt; deferred income taxes; common stock and paid in capital and treasury stock. Retained earnings is a residual account and will not have allocated tolerable misstatement by Jones. For assigning tolerable misstatement to accounts Jones uses the relative size of the accounts. Decide on planning materiality; tolerable misstatement allocation to accounts and adjust for qualitative factors if necessary.
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Case 2 ACIS 3414 Summer 2016 Calabro Paging Services December 31, 2015 Balance Sheet Amount Allocation Based on Relative Size Tolerable Misstatement Cash Accounts receivable, net Inventory Other current assets Property, plant and equipment, net Other assets $517,000 3,583,000 865,000 2,074,000 20,184,000 2,388,000 Total $29,611,000 Current installments of long-term debt Accounts payable Other accrued expenses and liabilities Long-term debt Deferred income taxes Common stock and paid-in-capital Retained earnings Less: Treasury stock $ 424,000 621,000 5,052,000 3,467,000 197,000 19,945,000 1,090,000 (1,185,000) Total $29,611,000
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