Tolerable Misstatement - Assignment Example

There is normally a high risk of misstatement for accounts receivable as there is a possibility that debts may not be collectible due to the inability of customers (debtors) to pay. It is important to ensure that the amounts are collectible so that adequate provisions can be made. Tests should be done to determine the age of the debts in comparison to the terms given to debtors’ confirmations should also be sent on the bass of materiality. Additionally, the auditor should ensure that amounts stated as receivables are not disputed due to poor record keeping or inadequate controls over cash receipts.

The amount represented by 2% is $172. Therefore, if the amounts are misstated by that amount it is not a major problem. However, if the amount by which the figure is misstated is greater than $172 then there is a cause for concern. The receivables figure has declined by over 30% while revenues have increased. It is important to determine the reason for this. Receivables are susceptible to both intentional and unintentional misstatements and a lot of work will be required to verify such balances.

Prepaid advertising $200 The tolerable misstatement of 2% is within the limits recommended (Willis & Adams 3-2). Prepaid advertising is a current asset that may be fairly easy to check as it involves making a determination of the amount paid for advertising. However, if the number of advertisements is large or the dates when the advertisement should start and end are not recorded then there is the risk that it may be misstated. Explanations to support Work Paper 3-8, continuing ACCOUNT NAME TOLERABLE MISSTATEMENT EXPLANATION Computer hardware and software $400 The change over prior year is approximately 8% and indicates that there were substantial additions to this fixed asset.

It is normal that all additions to fixed assets are verified. Additionally, the amounts amortized should be tested to ensure that the computations are accurate. Furthermore, they should be checked to ensure that the assets included are properly classified. However, a 1% misstatement is immaterial and therefore tolerable (Willis & Adams 3-2). Leasehold improvements $150 The tolerable misstatement of 5% appears to be rather high since this is a fixed asset. This type of asset normally requires 100% verification.

However, there has been no major change in leasehold improvements from the prior year. Willis & Adams (3-2) indicates that the tolerable limit for total assets is 0.5%. When compared to total assets the amount is very immaterial and so a tolerable limit of 5% for this asset is immaterial. Accumulated depreciation and amortization $150 The amount for depreciation is prone to error and it has to be thoroughly checked. There has been an approximate 15% increase and this increase needs to be verified.

There is really no room for error as its calculation is very objective. Explanations to support Work Paper 3-8, continuing ACCOUNT NAME TOLERABLE MISSTATEMENT EXPLANATION Intangible assets, net $100 The valuation of intangible assets is subjective and so there is the risk of misstatement. Although the change is approximately 300% it is not large in comparison to other fixed assets. Since the total amount is small a tolerable misstatement of 6% would not significantly affect the materiality levels for total fixed assets.

Accounts payable $180 Accounts payable is prone to misstatement and so companies are prone