Establishing materiality and allocation of materiality to individual accounts requires considerable judgment. Access Microsoft’s 2009 financial statements at www.microsoft.com (use the “investor relations” link).
a. Assume that your firm’s materiality guidelines indicate that materiality should be between three and six percent of net income before taxes. What percentage and dollar amount of materiality would you use for the audit of Microsoft? Explain.
b. What asset accounts on Microsoft’s balance sheet should be allocated the largest amount of tolerable misstatement? Explain.