Chapter 9 Materiality and Risk - HCC Learning Web

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9-36 (continued)a. Stanton's background problems.b. Stanton's autocratic management style.c. Some indication of deficiencies in the control environment,particularly rejection of recommendation to establish an internalaudit function.3. Inherent risk for cutoff is considered high due to the Company'srapid growth in 2009 and the general frequency of cutoff errors.4. Inherent risk for realizable value is considered high because of theCompany's rapid growth and the amount of judgment involved inestablishing the allowance for uncollectible accounts.5. The analytical procedures performed are preliminary only, and don'tprovide substantive evidence. However, they can indicate areaswhere possible problems exist. In other words, they can't lower risk,but can increase it. In this case, they corroborate the high inherentrisk level specified for cutoff and realizable value.Stanton EnterprisesWorksheet 9-36ADetermination of Materiality andAllocation to the Accounts12/31/2009DETERMINATION OF MATERIALITY:Income before taxes $8,004,277Possible adjustments - estimated.See Worksheet 9-36b:Increase allowance foruncollectible accounts (60,248) Increase to 1.7%of trade accountsreceivable.Increase accounts payable (1,069,997) Reflect sameincrease as costof goods sold.Pension cost NA Can't estimate.May or may notbe required.Adjusted net income before taxes $6,874,0325 percent $ 343,702Round down to $ 340,000Note: A key consideration is whether theCompany will be required to make itsadditional pension contribution. As moreinformation is obtained, the amountconsidered material may be reduced toassure any possible misstatements inearnings are considered in light of thatcontractual obligation.9-18
9-36 (continued)Stanton EnterprisesWorksheet 9-36A, cont.ALLOCATION TO THE ACCOUNTS:Prelim.12/31/09TolerableMisstatementCash $243,689 10000 Easy to audit at low cost.Trade accounts receivable 3,544,009 80000 Large tolerable misstatement (TM) because accountis large and requires extensive sampling to audit.Allowance for uncollectible accounts (120,000) 15000 Fairly low TM because of inherent risk.Inventories 4,520,902 100000 Large TM because account is large andrequires extensive sampling to audit.Prepaid expenses 29,500 5000 Easy to audit at low cost.Total current assets 8,218,100Property, plant and equipment, at cost 12,945,255 100000 Small TM as a percent of account balancebecause most of balance is unchanged fromprior year & audit of additions is relatively low cost.Less: accumulated depreciation (4,382,990) 50000 Fairly tight TM due to possible risk of8,562,265 misstatement. See 9-36B.Goodwill 1,200,000 20000 Fairly tight TM due to possible risk ofTotal assets $17,980,365 misstatement. See 9-36B.Accounts payable $2,141,552 70000 LargeTM because account is large andrequires extensive sampling to audit.Bank loan payable 150,000 0 Easy to audit at low cost.Accrued liabilities 723,600 20000 Easy to audit at low cost.Federal income taxes payable 1,200,000 40000 Fairly tight TM due to possible risk ofmisstatement. See 9-35B.Current portion of long-term 240,000 0 Easy to audit at low cost.Total current liabilities 4,455,152Long-term debt 960,000 0 Easy to audit at low cost.Stockholders' equity:Common stock 1,250,000 0 Easy to audit at low cost.Additional paid-in capital 2,469,921 0 Easy to audit at low cost.Retained earnings 8,845,292 NATotal stockholders' equity 12,565,213Total liabilities and stockholders' equity $17,980,365 $510,000 (1.5 x $340,000)9-19
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