3-31

Scenario 1:

a) Because Murphy & Johnson is a private owned company, it should use 5% of their
income before taxes.

The planning materiality = net income before tax percentage of income used = 775 x 5% =
38,75 M

A reasonable level of misrepresentation should be determined using 50% of net revenue

since the planning materiality in this scenario is not particularly high. The reason for this is
because 50% is the safest and most risk-free value to use when assessing what qualifies as
a tolerable inaccuracy.

Tolerable misstatement= 38.75 M x 0,50 = 19,375 M

b)
Murphy & Johnson's auditor can give them advice on how the necessary modifications to the
financial statement might be made if the discovered inaccuracies are more significant than
the anticipated materiality. The auditor should be completely aware of the errors because
they could influence how they assess risk.

Scenario 2:

a) It is easy to see that Delta investments provides a group of mutual funds for investors, so
it should use 5% of their total assets.

The planning materiality = Total assets x percentage of income used = 4,3 B x 5% = 21,5 M

A reasonable level of misrepresentation should be determined using 50% of the total assets
since the planning materiality in this scenario is not particularly high. The reason for this is
because 50% is the safest and most risk-free value to use when assessing what qualifies as
a tolerable inaccuracy.
Tolerable misstatement =21.5 M x 0,50 = 10,75 M

b)
If the found errors are more substantial than expected, Delta Investments' auditor can
provide guidance on how the financial statement should be amended. The auditor should be
completely aware of the errors because they could influence how they assess risk.

Scenario 3:

a) Because swell computers is a public company, it should use 5% of its total revenue.

The planning materiality = Total revenue x percentage of income used = 7 B x 5%= 35 M

A reasonable level of misrepresentation should be determined using 50% of the entire

revenue since the planning materiality in this scenario is not particularly high. The reason for
this is because 50% is the safest and most risk-free value to use when assessing what
qualifies as a tolerable inaccuracy.

Tolerable misstatement=35M x 0,50 = 17.5 M

b)
Swell Computers' auditor can provide guidance on how the necessary changes to the
financial statement can be made if the found errors are more serious than expected. The
auditor should be completely aware of the errors because they could influence how they
assess risk.