Question

If a company has income before taxes of $15,000,000 and the auditor decides that 7% of that amount would be material, what would be the overall materiality for the audit engagement.

Answer 1

The overall materiality for the audit engagement is $1,050,000, which is calculated as 7% of the company's income before taxes of $15,000,000.

Step-by-step explanation:

If a company has income before taxes of $15,000,000 and the auditor has set a materiality threshold of 7%, the overall materiality for the audit engagement would be 7% of $15,000,000, which is $1,050,000. This means that any misstatements in the financial statements under this amount are considered not material. However, misstatements totaling more than this threshold could significantly affect the economic decisions of users taken on the basis of the financial statements.