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15 April, 18:57

EarthWear's income before taxes is $36 million (rounded). Assume that the auditors have decided that 5 percent of this benchmark is appropriate for planning materiality and allocate 50 percent of it as tolerable misstatement. b. Determine a tolerable difference for your analytical procedure. (Enter your answer in dollars not millions of dollars)

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  1. 15 April, 19:45
    Answer: $900000


    The second step in any substantive analytical procedures decision process is to determine or calculate a tolerable difference. Since the expectation developed by the auditor will slightly be identical to the client's recorded amount, the auditor must make a decision about the amount of difference that would require further investigation. The size of the tolerable difference relies on the significance of the account, the desired degree of reliance on the analytical procedure, the level of disaggregation in the amount being tested, and the precision of the expectation.

    In the above statement,

    The tolerable misstatement = 50%

    Income before taxes = $36million

    5% benchmark appropriate for planning materiality.


    The tolerable difference for the analytical procedure:

    $36million * 0.05 * 0.5

    = $900000
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