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Auditing Cases

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1 Running head: AUDITING CASES Auditing cases Name: Course: Institutional Affiliation: AUDITING CASES 2 Auditing cases Question 6: a) In the event the generally accepted needs disclosure of this contingency, management must perform. Although the administration does not consider the claim as immaterial to the financial statement for December 31, 2015, users would view it as material. The management may gain in the short term, but there is a possibility of suffering an adverse outcome as the creditors and investors could take legal action against them. The auditor needs to compare the materiality of the item for the entire financial statement to establish whether its influence is material or not. AU-C Section 320.A5 states – Use of benchmarks. In determining materiality for the financial report as a whole, the auditor establishes planning materiality by using benching, for instance, total assets, pretax or total income, in the case above, by using a span of 2-5% of net income or pretax. If the pretax profit was $3.9 million, materiality is estimated to be between $78,000 and $195,000. On the other hand, the attorney’s estimated potential loss falls between $195000 and $265,000. Hence it exceeds the estimate of the auditor, therefore concluding that the loss contingency to December 31, 2014, financial statements is material. b) No accrual is needed because the outcome assessment falls on the reasonable possible range. Hence, the statement of financial position and inco ...
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