Windy Atmawardani Rachman (21207174)
SMAK01-7
Auditing 2
1. Imagine that you are employed as an auditor in a CPA firm that performs the audit of Microsoft. Your firm’s materiality guidelines indicate that overall engagement materiality should be set at an amount between five and ten percent of income before taxes.
a. Apply your firm’s guidelines to Microsoft’s 2003 financial statements. What percentage of income before taxes do you believe is appropriate? Why? What do you believe overall engagement materiality should have been for 2003?
b. Given Microsoft’s 2003 balance sheet, what asset line items would be allocated the highest amount of tolerable misstatement? Why?
Answer :
1. a.
- Percentage of income before taxes is 5% to 10% because Financial reporting reasonable is if not exceed misstatement materiality level.
- Overall engagement materiality should have been for 2003 is Determine the initial consideration of the materiality, Allocate initial consideration of materiality to the segment, Estimated total errors in the segment, Estimate the combined error and Compare estimates with the combined initial consideration of the materiality.
1. b Balance Sheets
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| June 30 | 2002 | 2003 | ||||
| Assets | ||||||
| Current assets: | ||||||
| Cash and equivalents | $ | 3,016 | $ | 6,438 | ||
| Short-term investments | 35,636 | 42,610 | ||||
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| Total cash and short-term investments | 38,652 | 49,048 | ||||
| Accounts receivable, net | 5,129 | 5,196 | ||||
| Inventories | 673 | 640 | ||||
| Deferred income taxes | 2,112 | 2,506 | ||||
| Other | 2,010 | 1,583 | ||||
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| Total current assets | 48,576 | 58,973 | ||||
| Property and equipment, net | 2,268 | 2,223 | ||||
| Equity and other investments | 14,191 | 13,692 | ||||
| Goodwill | 1,426 | 3,128 | ||||
| Intangible assets, net | 243 | 384 | ||||
| Other long-term assets | 942 | 1,171 | ||||
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| Total assets | $ | 67,646 | $ | 79,571 | ||
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| Liabilities and stockholders’ equity | ||||||
| Current liabilities: | ||||||
| Accounts payable | $ | 1,208 | $ | 1,573 | ||
| Accrued compensation | 1,145 | 1,416 | ||||
| Income taxes | 2,022 | 2,044 | ||||
| Short-term unearned revenue | 5,920 | 7,225 | ||||
| Other | 2,449 | 1,716 | ||||
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| Total current liabilities | 12,744 | 13,974 | ||||
| Long-term unearned revenue | 1,823 | 1,790 | ||||
| Deferred income taxes | 398 | 1,731 | ||||
| Other long-term liabilities | 501 | 1,056 | ||||
| Commitments and contingencies | ||||||
| Stockholders’ equity: | ||||||
| Common stock and paid-in capital – shares authorized 24,000; Shares issued and outstanding 10,718 and 10,771 | 31,647 | 35,344 | ||||
| Retained earnings, including accumulated other comprehensive income of $583 and $1,840 | 20,533 | 25,676 | ||||
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| Total stockholders’ equity | 52,180 | 61,020 | ||||
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| Total liabilities and stockholders’ equity | $ | 67,646 | $ | 79,571 | ||
Asset line items allocated the highest amount of tolerable misstatement is account receivable because in cash flow statement account receivables show increase amount in every year
Source : https://investor.shareholder.com/msft/EdgarDetail.asp?CIK=789019&FID=1193125-03-45632&SID=03-00
