Using the section in AS 2110 called "Obtaining an Understanding of the Company and its Environment" as a guide, describe three major deficiencies of Garcia and Foster’s documentation on page 45. 2. Did Garcia and Foster compute materiality on page 44 correctly? According to AS 2105, what is the difference between planning materiality and tolerable misstatement?

Requirement 1:

Well I wasn't able to find the question, but I will list here almost all the possible documentation deficiencies that will play important part in planning audit.

The documentation deficiencies are mostly because of control risks and inherent risk and these are addressed below:

The control risk occurs when the internal control fails to bring efficiency in recording of facts and this practice results in material misstatement either due to error or fraud. So if the internal control system of Garcia and Foster is not well enough that it doesn't bring fairness in the transaction recordings then the internal control system would be high.

Inherent risk is the risk of material misstatement that is posed by an error or omission in recording of financial facts that would result in material misstatement and this is not because of failure of internal control system designed. Inherent risk occurs when a high degree of judgment is required for estimations, solving complex transactions like recording of financial instruments, etc.

Kindly have understanding of these so that you be able to identify the deficiencies of Garcia and Foster.

Requirement 2:

The setting of materiality is dependent on two things. These are professional judgement and the experience of the auditor. Following are some methods of calculating materiality level:

I think this will help you in deciding whether the materiality level set was correct or not.

Requirement 3:

The planning materiality is the materiality level set at the planning phase of audit. The materiality level is determined by analyzing the draft of financial statement presented by the management.

Whereas on the other hand, tolerable misstatement is the misstatement in the line item of financial statement but this misstatement doesn't impact the fair presentation of the financial statement. If the potential risks associated with the company which might include the internal control risk, inherent risk, audit risk, etc, are higher then the tolerable misstatement might be 10% of the materiality level set. This means if the associated risk with the company is high then the tolerable materiality level set would be lower so that the evidence gathered would be sufficient enough to form a right opinion about the truth and fairness of the financial statement. Furthermore, individually though the tolerable misstatement is not a material misstatement but the aggregate misstatement with other tolerable misstatement might surpass the materiality level. Thus setting tolerable level is very useful in the planning phase.

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