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Question: question 4 15 marks alexander robinson a junior auditor working...

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Question 4 (15 marks)

 

Alexander Robinson, a junior auditor working for Big One Accounting Firm. He is included in the audit team engaging in the audit the Financial Reports of Complicated Ltd., a listed company on AST. When evaluating audit results for assets in the audit, Alexander has set the preliminary judgment about materiality to be $67,000. He then allocated the materiality to all the asset accounts. The account balances, performance materiality and estimated overstatements in the accounts are shown below:

 

Account

 

Account balance

Performance materiality

Estimate of total overstatements

Cash

 

60,000

6,000

5,500

Account receivable

 

1,300,000

20,000

?

Inventory

 

2,100,000

60,000

45,000

Other assets

 

360,000

24,000

23,000

Total

 

4,090,000

110,000

 

 

Alexander has chosen a sample of $500,000 in Accounts Receivable. He tested it and uncovered $6000 in overstatement. He then checked on the individual accounts and all accounts in the total assets against the allocated performance materiality and the preliminary materiality to decide the acceptability of the financial statements.

 

Required:

a.         Ignoring sampling risk, what is the estimate of the total misstatement in Accounts Receivable? (2 marks)

b.         Why the total performance materiality is not the same as the preliminary materiality? Should they be equal? (2 marks)

c.        Based on the audit of the asset accounts and ignoring other accounts, are the overall financial statements acceptable? Please show workings to support the conclusion. (5 marks)

d.         What do you believe the auditor should do in the circumstances? (6 marks)

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