One of the audit clients Airtel has presented the income statement below to the audit firm Earnest and Young where you work as an assistant auditor.
Income Statement Assignment
Airtel Income Statement for the year ended December 31, 2018 ZMK
Cost of goods sold 680,480
Gross profit 711,520
Distribution Administration expenses 367,200
Profit from Operation 344,320
Gain on sale of equipment 56,000
Income before taxes 400,320
Income taxes 118,400
Net income 281,920
The audit partner has decided that 5% income before taxes benchmark is appropriate for overall materiality and tolerable misstatement has been estimated to be 60% of overall materiality.
a) Explain what overall materiality is and state some factors that the partner would have considered in deciding the 5 percent benchmark (5 marks)
b) Explain what tolerable misstatement is and state some factors that the partner would have considered in deciding the 60 percent benchmark.(5 marks)
c). Calculate the overall materiality, and tolerable misstatement. (2 marks)
d). During the course of the audit, the auditors discover that the revenue account has an invoice which was misstated by K8,200 explain the action that the auditors will take
e) Further, the auditors discover that in the distribution and Administration expenses account some invoices have been misstated by K17, 500.Explain the action that the auditors will take (3 marks)
f) Taking into account the two errors in (d) and (e) above, state the recommendations and explain the final decision that the auditor will make (7 marks)
Income Statement Assignment
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