9-25 a. The
justification for a lower preliminary judgment about materiality for
overstatements is directly related to legal liability and audit risk. Most
auditors believe they have a greater legal and professional responsibility to
discover overstatements of owners' equity than understatements because users
are likely to be more critical of overstatements. That does not imply there is
no responsibility for understatements.
b. There are two reasons for permitting
the sum of tolerable misstatements to exceed overall materiality. First, it is
unlikely that all accounts will be misstated by the full amount of tolerable
misstatement. Second, some accounts are likely to be overstated while others
are likely to be understated, resulting in net misstatement that is likely to
be less than overall materiality.
c. This results because of the estimate of
sampling error for each account. For example, the likely estimate of accounts
receivable is an understatement of $7,500 + or - a sampling error of $11,500.
You would be most concerned about understatement for accounts receivable
because the estimated understatement of $19,000 exceeds the tolerable
misstatement of $18,000 for that account.
d. You would be most concerned about
understatement amounts since the total estimated understatement amount
($30,000) exceeds the preliminary judgment about materiality for
understatements ($20,000). You would be most concerned about accounts
receivable given that the total misstatement for that account exceeds tolerable
misstatement for understatement.
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