Murphy & Johnson is a privately owned manufacturer of small motors for lawnmowers, tractors, and snowmobiles. The components of its financial statements are (1) income before taxes = $21 million, (2) total assets = $550 million, and (3) total revenues = $775 million.
a) Determine overall materiality and determine tolerable misstatement. Justify your decisions.

Auditing:it enables business managers,consultants,investors,regulatory agencies and creditors to take right decision on financial aspects of the entity,auditing also ensures that the financial information pertaining to he entity is reliable,credible,relevant and time bound.

Explanation:

Murphy & Johnson is a privately-owned company, we should use 5% of net income before taxes. => Planning Materiality = $21 million × 5% = $1.05 million. The planning materiality is not an extremely high number, so we will use 50% to help determine tolerable  misstatement,  as   it   is   a  safer  value   to  use  when  calculating   tolerable  misstatements because it has a lower risk. => Tolerable Misstatement = $1.05 million × 0.50 = $525,000.

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