EarthWear EarthWear Hands-on Mini-case Chapter 3 - Materiality and Tolerable Misstatement © The McGraw-Hill Companies, Inc., 202
In this mini-case yo" will determine plannin% materiality as well as tolerable misstatement amo"nts $or balance sheet acco"nts o$ &arth'ear Clothiers, Inc. 'hile many a"ditin% $irms "se a simple approach $or establishin% plannin% materiality and tolerable misstatement similar to the one ill"strated in yo"r te(tboo#, some $irms "se more detailed %"idelines that in)ol)e allocatin% a m"ltiple o$ plannin% materiality to balance sheet acco"nts. This case ill"strates one s"ch approach.
INSTRUCTIONS:
1
*ead the Materiality G"idelines $or 'illis + dams Cs. To open the %"idelines doc"ment please do"ble-clic# on the $ollowin% icon. doc"ment will open in Microso$t 'ord.
Document
2
!ollowin% the Materiality G"idelines $or 'illis + dams Cs, complete all the $ields on 'or# aper 3- indicated in yellow /'or# aper 3- is $o"nd on the ne(t tab o$ this wor#sheet. !or yo"r con)enience, &arth'ear !inancial 1tatements ha)e been incl"ded in wor#sheet tabs a$ter the wor#in% papers.
Name: Class:
ERTHWER C!OTHIERS "#annin$ Materia#it% &ece'(er 31) 2*12 (In thousands) Una+dited 2*12 /1)*10)0* /52)153 /*)154 /21)* /12*)1 /30)42
1, ench'ar. &ata 1ales 5 *e)en"e &(penses re-ta( income C"rrent assets C"rrent liabilities Total assets Materiality 2, Esta(#ish "#annin$ Materia#it% !ee# Meas+re'ent ase re-ta( income
3- Initial Here
0525206
2*11 7890,66 796:,383 739,9 7208,089 7:,2: 7328,898 7,00
*)154
"ercenta$e #ied6
5,*7
"#annin$ Materia#it%
/3)5*
ases and "ercenta$e Ran$es: ro$it ;riented &ntities Pre-tax income Total Revenue Current Assets or Liabilities Total Assets
3 - <= > - < 2 - 9< > - <
!or ublic comanies# $% is t&icall& the maximum.
?ot-$or-ro$it &ntities
lease "se this template in con@"nction with 'illis + dams Materiality G"idelines. The materiality $actors pro)ided are %"idelines only and sho"ld be "sed only as an aid as yo" "se pro$essional @"d%ment to determine plannin% materiality.
Name: Class:
ERTHWER C!OTHIERS ##ocation o9 Materia#it%: To#era(#e Misstate'ents &ece'(er 31) 2*12 (In thousands) Plannin* +aterialit& ,rom or aer /-01
cco+nt Na'e
2*12 Una+dited Tria# a#ance
2*11
3- Initial Here
0525206
2/#$34
To#era(#e Misstate'ent
76,8 72,9
/0)350 /)43
7900 700
722,33
/14)03
72,300
7,69
/1*)212
700
;ther prepaid e(penses
7:,39
/5)435
7200
Ae$erred income ta( bene$its
7,32
/1*)33
7290
Band and b"ildin%s !i(t"res and e4"ipment Comp"ter hardware and so$tware Beasehold impro)ements
70,8 7:,93 7:6,8: 73,00
/)5* /)32 /5)4** /3)144
790 790 7,300 760
cc"m"lated depreciation and amortiation
79,8:
/0)22
72,900
7623
/1)34
7200
7,0 7:2,908
/1*)51* /54)1
7300 7,00
79,80
/)1**
7600
72:,3 7,932 7,9 78,6:8
/3*)402 /3)1* /1)222 /)345
700 7200 7300 7290
72: 79,6:0 720,60 /78 73,3 73,80 /7 63,8 90
/21 /5)4* /25)10 ?/3@ /2)13 /31)4*2 ?/134)512@
Cash and cash e4"i)alents *ecei)ables, net In)entory repaid ad)ertisin%
Intan%ibles, net Bines o$ credit cco"nts payable *eser)e $or ret"rns ccr"ed liabilities ccr"ed pro$it sharin% Income ta(es payable Ae$erred income ta(es Common stoc#, 2:,2 shares iss"ed Aonated capital dditional paid-in capital Ae$erred compensation cc"m"lated other comprehensi)e income *etained earnin%s Tr ea s" ry stoc#, : ,9 6: a nd : , 0: sha res a t co st, re spe cti)e ly Co'(ined To#era(#e Misstate'ent ?co#+'n 3@ Maa(#e Aor Co'(ined To#era(#e Misstate'ent6 Net Re'ainin$ ##o>ance Aor Co'(ined To#era(#e Misstate'ent
=!o"r Times lannin% Materiality. In the te(tboo#, a more %eneral approach to allocate no more than 9< o$ plannin% materiality to acco"nts as tolerable misstatement is $ollowed. Howe)er, as noted in the disc"ssion on materiality in Chapter 3 o$ the te(t, some $irms do "se a m"ltiple approach. This mini-case "ses the m"ltiple approach to pro)ide hands-on practice at allocatin% tolerable misstatement to acco"nts.
© The McGraw-Hill Companies, Inc., 202
"ercenta$e o9 cco+nt
E<#anation
< Easi#% eri9ied 8< !ar$e and co'#e< acco+nt >ith 'isstate'ents e<ected) cost#% to a+dit 2< Lar*e and comlex account ith misstatements exected# costl& to audit <
Re#atie#% #itt#e chan$e 9ro' rior %ear) not di99ic+#t to a+dit 6< Relativel& routine accountin*# tested lar*el& via reasonableness anal&tical rocedures 2< Relativel& comlex# estimation involved# related to 8e,erred Income Taxes < Relativel& little chan*e ,rom rior &ear# not di,,icult to audit < Relativel& little chan*e ,rom rior &ear# not di,,icult to audit 2< Easi#% eri9ied) s+(=ect to i'air'ent <
Re#atie#% #itt#e chan$e 9ro' rior %ear) not di99ic+#t to a+dit 3< cco+ntin$ esti'ate) tested #ar$e#% ia s+(stantie ana#%tica# roced+re 2< Ino#es so'e co'#e< a#ications o9 B") s+(=ect to i'air'ent 3< Relativel& little volume# not di,,icult to audit via /rd art& in,o 3< !ar$e and co'#e< acco+nt >ith 'isstate'ents e<ected) cost#% to a+dit < Accountin* estimate# tested lar*el& via substantive ana l&tical rocedure 2< So'e>hat cost#% to a+dit) so'e di99erences e<ected :< 5omehat costl& to audit# some di,,erences exected 2< Re#atie#% co'#e<) esti'ation ino#ed 3< Relativel& comlex# estimation involved# related to 8e,erred Income Tax 9ene,its 0< o chan*e ,rom rior &ear# easil& veri,ied 0< o chan*e ,rom rior &ear# easil& veri,ied < Little chan*e ,rom rior &ear# not di,,icult to audit 3< ot di,,icult to audit# examine current &ear vestin* activit& 2< Involves some comlex alications o, 6AAP
70 70 7200 7 790 ? 7200 0< Little chan*e ,rom rior &ear# not di,,icult to audit /13)001 Combined Tolerable +isstatement 7ithin Accetable Limits /14)*31 /4*
-
ERTHWER C!OTHIERS Conso#idated a#ance Sheets (In thousands)
PBC
2535202 Aecember 3
ssets C+rrent ssets: Cash and cash e4"i)alents *ecei)ables, net In)entory repaid ad)ertisin% ;ther prepaid e(penses Ae$erred income ta( bene$its Total c"rrent assets "roert%) #ant and e+i'ent) at cost Band and b"ildin%s !i(t"res and e4"ipment Comp"ter hardware and so$tware Beasehold impro)ements Total property, plant and e4"ipment Bess - acc"m"lated depreciation and amortiation roperty, plant and e4"ipment, net Intan%ibles, net Total assets !ia(i#ities and shareho#derDs inest'ent C+rrent #ia(i#ities: Bines o$ credit cco"nts payable *eser)e $or ret"rns ccr"ed liabilities ccr"ed pro$it sharin% Income ta(es payable Total c"rrent liabilities &e9erred inco'e ta
2*12 ?+na+dited@
2*11
2*1*
/0)350 /)43 /14)03 /1*)212 /5)435 /1*)33 /21)*
76,8 72,9 722,33 7,69 7:,39 7,32 7208,089
768,:: 7,938 709,629 70,2 73,0 7:,830 7,9
/)5* /)32 /5)4** /3)144 /223)3 /0)22 /12)*14 /1)34 /30)42
70,8 7:,93 7:6,8: 73,00 720:,62: 79,8: 720,660 7623 7328,898
7::,06 7::,: 76,6:: 72,86 76,060 7:,29: 70,6 7:2 728:,92
/1*)51* /54)1 /)1** /3*)402 /3)1* /1)222 /12*)1 /)345
7,0 7:2,908 79,80 72:,3 7,932 7,9 7:,2: 78,6:8
7,:2 76,632 79,9 72,660 7,86 7:,::: 78,0: 79,82:
PBC:
Prepared by Client
-2
ERTHWER C!OTHIERS Conso#idated State'ents o9 Oerations (In thousands# excet er share data)
PBC
2535202
!or the period ended Aecember 3
Net Sa#es Cost o$ sales Gross ro$it 1ellin%, %eneral and administrati)e e(penses ?on-rec"rrin% char%e /credit Inco'e 9ro' oerations ;ther income /e(penseE Interest e(pense Interest income Gain on sale o$ s"bsidiary ;ther Total other income /e(pense, net Income be$ore income ta(es Income ta( pro)ision Net inco'e asic earnin$s er share &i#+ted earnin$s er share Fasic wei%hted a)era%e shares o"tstandin% Ail"ted wei%hted a)era%e shares o"tstandin%
© The McGraw-Hill Companies, Inc., 202
2*12 ?+na+dited@ /1)*10)0* /52)153 /44)3 /34)1*
7890,66 796:,383 7606,08 73:6,02
/3)55
760,28
79,9 762,38 739,6: 7336,886 /7,93 79,309
?/@ /00
/783 7,698
/7,228 793
?/3)514@ ?/3)4*3@ /*)154 /2)5 /43)405 1,4 1,45 10)150 10)45
/76,8 /76,322 739,9 73,230 722,92 .9 .6 8,93 8,6
/7,08 /7,6 768,998 7,33 73,222 .:0 .9: 8,999 20,099
2*11
2*1*
PBC:
Prepared by Client
-3
ERTHWER C!OTHIERS Conso#idated State'ents o9 Cash A#o>s (In thousands)
PBC
2535202 !or the period ended Aecember 3
Cash 9#o>s 9ro' ?+sed 9or@ oeratin$ actiities: Net inco'e d@"stments to reconcile net income to net cash $lows $rom operatin% acti)itiesE ?on-rec"rrin% char%e /credit Aepreciation and amortiation Ae$erred compensation e(pense Ae$erred income ta(es reta( %ain on sale o$ s"bsidiary Boss on disposal o$ $i(ed assets Chan%es in assets and liabilities e(cl"din% the e$$ects o$ di)estit"resE *ecei)ables, net In)entory repaid ad)ertisin% ;ther prepaid e(penses cco"nts payable *eser)e $or ret"rns ccr"ed liabilities ccr"ed pro$it sharin% Income ta(es payable Ta( bene$it o$ stoc# options ;ther ?et cash $rom /"sed $or operatin% acti)ities Cash 9#o>s 9ro' ?+sed 9or@ inestin$ actiities: Cash paid $or capital additions roceeds $rom sale o$ s"bsidiary ?et cash $lows "sed $or in)estin% acti)ities Cash 9#o>s 9ro' ?+sed 9or@ 9inancin$ actiities: roceeds $rom /payment o$ short-term debt "rchases o$ treas"ry stoc# Iss"ance o$ treas"ry stoc# ?et cash $lows "sed $or $inancin% acti)ities
2*12 ?+na+dited@ /43)405
2*11
2*1*
722,92
73,222
/1)515 /42 ?/4)33*@
79,23 79 73,360
/7,93 73,6:9 703 79,3:
/1)5
726
7:02
/4)232 ?/25)35@ /1)24 ?/1@ ?/)323@ /21* /5)5*2 /1)5 /)34 /4)00 ?/1)4*4@ /4)
/7,33: /7:,82 /7:: /72,936 76,0 79 /708 /72:2 7,823 7,628 72,66 738,3:
72,:9 73,30 73,0 7,92 /7, 7638 /76,82 732 /72,0 7,:9 763 78,
?/2)334@
/72,898
/7,20
?/2)334@
/72,898
/7,20
?/5*1@ ?/)*52@ /1)40* /)03
73,380 /7,82 73,06 /7 08
/7,:82 /72,839 76,3 /7: 30
PBC:
Prepared by Client
-6
ERTHWER C!OTHIERS Conso#idated State'ents o9 Stoc.ho#dersD Inest'ent (In thousands)
Comprehensi)e Income Falance, Aecember 3, 2008 "rchase o$ treas"ry stoc# Iss"ance o$ treas"ry stoc# Ta( bene$it o$ stoc# options e(ercised Ae$erred compensation e(pense Comprehensi)e incomeE ?et income !orei%n c"rrency translation ad@"stments nrealied %ain on $orward contracts Comprehensi)e income Falance, Aecember 3, 200 "rchase o$ treas"ry stoc# Iss"ance o$ treas"ry stoc# Ta( bene$it o$ stoc# options e(ercised Ae$erred compensation e(pense Comprehensi)e incomeE ?et income ;ther comprehensi)e incomeE !orei%n c"rrency translation ad@"stments nrealied %ain on $orward contracts Comprehensi)e income Falance, Aecember 3, 20 "rchase o$ treas"ry stoc# Iss"ance o$ treas"ry stoc# Ta( bene$it o$ stoc# options e(ercised Ae$erred compensation e(pense Comprehensi)e incomeE ?et income ;ther comprehensi)e incomeE !orei%n c"rrency translation ad@"stments nrealied %ain on $orward contracts Comprehensi)e income Falance, Aecember 3, 202
© The McGraw-Hill Companies, Inc., 202
Common 1toc# 72:
Aonated Capital 79,6:0
dditional aid-in Capital 7,96:
PBC
2535202
Ae$erred Compensation /729
cc"m"lated ;ther Comprehensi)e Income 7,302
*etained &arnin%s 72:6,9
Treas"ry 1toc# /730,66 /72,839 76,3
7,:9 703 73,222 7:0 73 73,:98
73,222
73,222 7:0 73
7:0 73 72:
79,6:0
78,3
/796
7,38
7289,30
/728,6:2 /7,82 73,06
7,628 79 722,92
722,92
/7,9 73,289 726,: 79,6:0
720,60
/78
73,3
/7,9 73,289 73,80
/763,890 /7,092 7,680
76,88 762 763,689
782,936 /7,82 73,06 7,628 79 722,92
/7,9 73,289 72:
Total 79,:2: /72,839 76,3 7,:9 703
7206,222 /7,092 7,680 76,88 762 763,689
763,689
/722 /7,68 76,9
/722 /7,68 72:
79,6:0
729,8
/73:
72,3
/722 /7,68 73:,602
/736,92
72:0,6:
PBC:
Prepared by Client
-9
ERTHWER C!OTHIERS Aie-;ear Conso#idated Ainancia# S+''ar% ?+na+dited@ (In thousands# excet er share data)
PBC
2535202
!or the period ended Aecember 3
2*12 ?+na+dited@
2*11
2*1*
2**0
2**
1)*10)0* *)154 ,07 43)405
890,66 39,9 3.< 22,92
9,9 68,998 9.< 3,222
8,386 32,9 3.:< 20,20
2,398 ::,: .< 6,:8
1,4 1,45 10)150
.9 .6 8,93
.:0 .9: 8,999
.02 .0 8,0:
2.0 2.00 20,03
21)* 12*)1 12)4 30)42 )345 2*)4
208,089 :,2: 20,:6 328,898 8,6:8 206,222
,9 8,0: 0,62 28:,92 9,82: 82,939
8,28 33,636 09,09 28:,36 9,2: 9,:2
86,669 ,30 ,32 2,9 9,:: 9,:3
141)*3 2)334 1)515 107 127
82,2 2,898 9,23 < <
80,06 ,20 3,6:9 < <
9,:3 30,3 2,9 3< <
:,3: 3,36 8,33 2< :<
Inco'e state'ent data: ?et 1ales reta( Income ercent o$ net sales ?et income "er share o9 co''on stoc.: Fasic earnin%s per share Ail"ted earnin%s per share Common shares o"tstandin% a#ance sheet data: C"rrent assets C"rrent liabilities & and intan%ibles Total assets ?onc"rrent liabilities 1hareholdersD in)estment Other data: ?et wor#in% capital Capital e(pendit"res Aepreciation and amortiation e(pense *et"rn on a)era%e shareholdersD in)estment *et"rn on a)era%e assets
© The McGraw-Hill Companies, Inc., 202
PBC:
Prepared by Client
