SCENARIO 1:

a) Planning Materiality: Net Income before Taxes: 21 million x 5% = 1.05 million

Tolerable misstatement: 1.05 million x 50% = 525,000
b) Audit findings: The total misstatement is 1.25 million, which is greater than the tolerable
misstatement amount and greater than the overall financial statement materiality. The
client needs to adjust the financial statements or the auditor has to issue a qualified
opinion.
SCENARIO 2:
a) Planning Materiality: Net Income before Taxes: 40 million x 5% = 2 million
Tolerable misstatement: 2 million x 50% = 1 million
b) Audit findings: The total misstatement is 5.75 million, which is greater than the tolerable
misstatement amount and greater than the overall financial statement materiality. The
client needs to adjust the financial statements or the auditor has to issue a qualified
opinion.
SCENARIO 3:
a) Planning Materiality: Net Income before Taxes: 500,000 x 5% = 25,000
Tolerable misstatement: 25,000 x 50% = 12,500
b) Audit findings: The total misstatement is 1.5 million, which is greater than the tolerable
misstatement amount and greater than the overall financial statement materiality. The
client needs to adjust the financial statements or the auditor has to issue a qualified
opinion.