Principles Of Taxation For Business And Investment Planning 2020 Edition
23rd Edition
ISBN: 9781259969546
Author: Sally Jones, Shelley C. Rhoades-Catanach, Sandra R Callaghan
Publisher: McGraw-Hill Education
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Chapter 18, Problem 4QPD
To determine
Describe the reason for which the percent of audit differs, if there is a huge difference between AGI.
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You are reviewing the results of the Firestone audit. These are the details of the summay of identified misstatements:
• Allowance for Doubtful Accounts: $60,000 misstatement (over) • Sales Revenue: $10,000 misstatement (under)
• Total identified misstatements: $50,000 (impact on Assets, pre-tax income, and equity)
• Performance materiality was set at $60,000
REQUIRED:
a) If overall materaility for the audit was set at $30,000, what type of audit report would be issued? Why?Â
b) If overall materiality for the audit was set at $75,000, what type of audit report would be issued? Why?
In considering materiality for planning purposes, an auditor believes that misstatements aggregating 1% of the total assets, where total assets is P1,000,000 would have a material effect on an entity’s balance sheet, but that misstatements would have to aggregate 5% of gross margin, where gross margin is P4,000,000 to materially affect the income statement. Ordinarily, it would be appropriate to design auditing procedures that would be expected to detect misstatements that aggregate
Group of answer choices
P300,000
P150,000
P100,000
P200,000
{Auditing}
37. Based on professional judgment an auditor establishes that if the amount of error or omission is within 1% of total revenue it is not considered as misstatement. Assume, the amount of service revenue is overstated by OMR 5,000 which is 5% of total revenue. Does it amount to material misstatement?
a.
No, as the percentage of misstated amount is less than 1% of total revenue
b.
Unable to decide as the data is inadequate
c.
None of the options
d.
Yes, as the percentage of materially misstated amount is more than 1% of total revenue
Chapter 18 Solutions
Principles Of Taxation For Business And Investment Planning 2020 Edition
Ch. 18 - Prob. 1QPDCh. 18 - Prob. 2QPDCh. 18 - Prob. 3QPDCh. 18 - Prob. 4QPDCh. 18 - Prob. 5QPDCh. 18 - Prob. 6QPDCh. 18 - Prob. 7QPDCh. 18 - Prob. 8QPDCh. 18 - Prob. 9QPDCh. 18 - Prob. 10QPD
Ch. 18 - Prob. 11QPDCh. 18 - Prob. 12QPDCh. 18 - Prob. 13QPDCh. 18 - Prob. 14QPDCh. 18 - Prob. 1APCh. 18 - Prob. 2APCh. 18 - Prob. 3APCh. 18 - Prob. 4APCh. 18 - Prob. 5APCh. 18 - Prob. 6APCh. 18 - Prob. 7APCh. 18 - Prob. 8APCh. 18 - Prob. 9APCh. 18 - Prob. 10APCh. 18 - Prob. 11APCh. 18 - Prob. 12APCh. 18 - A revenue agent determined that Ms. Owen underpaid...Ch. 18 - Prob. 14APCh. 18 - Prob. 15APCh. 18 - Prob. 16APCh. 18 - Prob. 17APCh. 18 - Prob. 18APCh. 18 - Prob. 19APCh. 18 - Prob. 20APCh. 18 - Prob. 22APCh. 18 - Prob. 8IRPCh. 18 - Prob. 9IRPCh. 18 - Prob. 1RPCh. 18 - Prob. 2RPCh. 18 - Prob. 1TPCCh. 18 - Prob. 2TPC
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- {Auditing} 17. Based on professional judgment an auditor establishes that if the amount of error or omission is within 2% of total assets, it is not considered as misstatement. Assume that the total assets of the entity are OMR 100,000. Current Assets are overstated by OMR 4,000 which is 4% of total assets. Does it amount to material misstatement? a. Yes, as the percentage of misstated amount is beyond 2% of total assets b. Unable to decide as the data is inadequate c. None of the options d. No, as the percentage of misstated amount is within 2% of total assetsarrow_forwardThe auditors assessed risk of material misstatement at 0.50 and said they wanted to achieve a0.05 risk of failing to express a correct opinion on financial statements that were materiallymisstated. What detection risk do the auditors plan to use for planning the remainder of theaudit work?a. 0.20.b. 0.10.c. 0.75.d. 0.00arrow_forwardAssume an auditor wishes to execute a meaningful analytical technique to offer audit evidence to assess EarthWear's $983,00 interest expense valuation or allocation allegation in 2018. The auditor will accomplish this by calculating an estimate of what the interest cost should be. What is a fair expectation estimate for the auditor?arrow_forward
- In an audit sampling application, an auditora. Performs procedures on all items in a balance and makes a conclusion about the entirebalance.b. Performs procedures on less than 100 percent of the items in a balance and formulates aconclusion about the entire balance.c. Performs procedures on less than 100 percent of the items in a class of transactions tobecome familiar with the client’s accounting system.d. Performs analytical procedures on the client’s unaudited financial statements when planning the audit.arrow_forwardPCAOB standards are used to conduct the audit for public companies. * True False If an auditor assigns a tolerable misstatement of $1,000 to accounts payable, he or she would need to obtain less audit evidence for that account than if $100,000 had been assigned. * True False An engagement letter establishes a clear understanding of the terms of the engagement between the client and the auditor. * True Falsearrow_forwardIn verifying accounts payable, it is common to restrict the auditsample to a small portion of the population items, whereas in auditing accrued property taxes,it is common to verify all transactions for the year. Explain the reason for the difference.arrow_forward
- Auditors often use the ________ to determine the estimated population exception rate.  current year's audit results tolerable exception rate preceeding year's audit results estimated computed by managementarrow_forward4. Comment( ethical or unethical) on the following computations of the auditor's professional fee: a. 10% of the client's tax adjustment b. 10% of the client's audited net income c. waiving of professional fee 5. What is the primary objective of the audit engagement letter? Give two(2) possible reasons why the auditor should be initiating the audit engagement letter similar to pages 27-28 Why should the audit engagement letter be renewed periodically? 6. Luzon, Inc., a publicly held company wishes to engage J. Cruz, a CPA, to examine its financial statements. Luzon was generally pleased with the services provided by its prior CPA, Dizon, but though the audit work performed was too detailed and interfered excessively with Luzon's normal office routines, Cruz asked Luzon to inform Dizon of the decision to change auditors, but Dizon did not wish to do so. REQUIRED: Describe the three(3) kinds of written communications to be accomplished by the receiving accountant to the existing…arrow_forward2. What is the revenue-recognition abuse identified in the article related to the percentage-of-completionmethod?3. Did revenue-recognition abuses tend to increase or decrease net income in the year they occurred?4. Did auditors tend to require their clients to make adjustments that reduced the revenue-recognition abusesthey detected?arrow_forward
- Auditors make materiality judgments during the planning/risk assessment phase of the audit to be sure they ultimatelygather sufficient evidence during the audit to provide reasonableassurance that the financial statements are free of material misstatements.The lower the materiality threshold that an auditorhas for an account balance, the more the evidence that the auditormust collect. Auditors often use quantitative benchmarks such as 1% of total assets or 5% of net income to determine whethermisstatements materially affect the financial statements, but ultimatelyit is an auditor’s individual professional judgment as towhether a given misstatement is or is not considered material.a. What is the relationship between the level of riskiness of theclient and the level of misstatement in an account balancethat an auditor would consider material? For example,assume that Client A has weaker controls over accountsreceivable compared to Client B (therefore, Client A is riskierthan Client B).…arrow_forwardA client uses percentages of aging categories to calculate the allowance for doubtful accounts. When auditing the allowance for doubtful accounts, the auditor must…  Question 4 options:  Ensure that the client’s aging categories are consistent with industry averages.  Ensure that the client has calculated the allowance for the current and all prior years using the same percentages for uncollectible accounts.  Perform tests to ensure that the aging categories are accurate.  Perform tests to ensure that management has not exercised judgment when calculating the allowance for doubtful accounts.arrow_forward_____ means the application of audit procedures to less than 100% of the items within an account balance or class of transactions to enable the auditor to obtain and evaluate audit evidence. a. Inspection b. Observation c. Audit sampling d. Analytical Procedurearrow_forward
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