Running Head: Case 7.1 Anne Aylor, Inc. 1

Running head: Case 7.1 Anne Aylor, Inc.
Case 7.1 Anne Aylor, Inc.
Lisa Lozano, Jessica Tuton, Nicholas Putnam, Reem Merrill, Sara Rivera and Tyler Call
ACC/546
November 21, 2016
Mr. Allan Foster

CASE 7.1 ANNE AYLOR, INC. 2
Anne Aylor, Inc.
[a] Why are different materiality bases considered when determining planning materiality?
When accounting departments and auditors are preparing quarterly or year-end financial
statements, they must do so with the understanding that these documents will be reviewed by a
broad audience, and the information and context they provide is quite valuable to the various
parties with a vested interest in the success of the firm. At the same time, not all aspects of the
financial statement are truly beneficial to all groups, as different perspectives do exist. An
example would be how current stockholders, and future, potential investors, are definitely
concerned with the firm's revenue, earnings, margin, and dividends, where as a potential lender
might view the firm with a different perspective, wanting to focus on the debt to income ratio,
and firm's assets, rather than other financial metrics.
[b] Why are different materiality thresholds relevant for different audit engagements?
One of the main reasons for a difference between the materiality thresholds between audit
engagements is that business operations can vary widely across industries and selling formats. A
construction company and a retail company may have a similar level of assets, but the nature of
revenues are entirely different along with their debt structure and nature of their
receivables/payables. Even within industries there can be major variances such as the difference
in assets for an e-commerce retailer vs a brick and mortar.
Additionally, known risk factors vary between companies based on size, historical audit
findings and relevance to who the financial statements are directed to. Proximity to debt
covenants can also add risk to an audit requiring tighter threshold levels
[c] Why is the materiality base that results in the smallest threshold generally used for
planning purposes?
The smallest base on which to determine materiality as stated in Exhibit 1 is that of Net
income before Income taxes. This is typically the case as net income is one of the last measures
on the income statement and generally smaller than most balance sheet account groups. When
the planning materiality threshold work paper is filled out, it validates this is the case as shown
below.
Net income 103,900 2.0% $ 2,078 7% $ 7,273

Revenue 1,305,600 0.5% $ 6,528 2% $ 26,112
Current Lia 205,200 2.0% $ 4,104 7% $ 14,364
Current Assets 347,100 2.0% $ 6,942 7% $ 24,297
Total assets 640,400 0.5% $ 3,202 2% $ 12,808
D. Why is the risk of management fraud considered when determining performance
materiality?
The risk of management fraud is considered when determining performance materiality
because management might be aware of audit materiality thresholds and use multiple account to
make the bottom line look better. The higher risk for management fraud, the more performance
materiality may need to be applied.
E. Why might an auditor not use the same performance materiality amount or percentage
of account balance for all financial statement accounts?
An auditor may use different performance materiality amounts or percentages for
different financial statement accounts because different accounts can have varying strengths of
controls. For instance, if a certain account has weak controls and there is a higher likelihood of
management fraud, the auditor can use a lower performance materiality threshold.
F) Why does the combined total of individual account performance materiality commonly
exceed the estimate of planning materiality?
The combined total of individual account performance materiality commonly exceed the
estimate of planning materiality due to matters that the performance materiality should not
exceed an amount of 75% of materiality planning and the performance threshold should not
exceed the following:
 25% of planning material if moderate likely hood of management fraud.
 50% of planning materiality if reasonably low likely hood of management fraud.
 75% of planning materiality if there was low likely hood of management.
With this being said, an individual case total can extend to 125% of planning material and
commonly it should not exceed 75% of planning material which was indicated above.
G) Why might certain trial balance amounts be projected when considering planning
materiality?
Planning materiality constitutes financial statement misstatement or neglect that could
happen prior to impacting the final decisions of people depending on the financial statements.
[2] Based on your review of the Exhibits (1 and 2) and audit memos (G-3 and G-4),
complete audit schedules G-5, G-6 and G-7.

Anne Aylor, Inc. Reference: _________G5_________________

Planning Materiality Assessment Prepared by: SR______________________
Year Ended: January 31, 2015 Date: 11/21/2015_____________________
Reviewed by: __________________________
Primary Users of Financial Statements (list):
Employees, suppliers, lenders, customers, and stockholders.
Materiality Bases (in thousands):

Base Fiscal 2014 Fiscal 2015 Planning Materiality Levels
Actual Projected
Financial Financial
Statement Statement Lower Limit Upper Limit
Amounts Amounts
Percent Dollar Amount Percent Dollar Amount
Income 84,463 103,900 2 2,078 7 7,273
Before
Taxes
Net 1,243,788 1,305,600 0.5 6,528 2 26,112
Revenues
Current 324,210 205,200 2 4,104 7 14,364
Liabilities
Current 322,320 347,100 2 6,942 7 24,297
Assets
Total Assets 640,000 0.5 3,202 2 12,800
593,255
Planning Materiality (in thousands):

$7273
Explanation: As of the close of the business on March 14, 2014 Anne Aylor had 48,879,663 shares of common
stock outstanding and Anne Aylor stock is traded on the New York Stock Exchange with a trading price of
$22.57.
Anne Aylor, Inc. Reference: G6_____________________

Performance Materiality Assessment Prepared by: SR
Year Ended: January 31, 2015 Date: 11/21/2016_____________________
Reviewed by: __________________________
Likelihood of Management Fraud (check one):

_X____ Low Likelihood of Management Fraud
______ Reasonably Low Likelihood of Management Fraud
______ Moderate Likelihood of Management Fraud
Tolerable Misstatement (in thousands):

Planning Materiality: $7273
Multiplication Factor (0.75 if low likelihood of management fraud, 0.50 if x 0.75
reasonably low likelihood of management fraud, and 0.25 if moderate
likelihood of management fraud.
Tolerable Misstatement (in thousands) 5454.75
Specific Accounts Requiring Lower Tolerable Misstatement:
Account Tolerable
Cash and Equivalents Misstatement
Explanation: $8,355
Projected: $124,200 Actual: 115,845
A low tolerable misstatement ( TM ) is assigned relative to the account

balance since the low cost competent evidence is available to test account
items.
Account: $1,008
Accounts Receivable
Explanation:
Projected: 13,900 Actual: 12,892
A high tolerable misstatement is assigned relative to the account balance

since high competence evidence is not available to test the valuation of
account items.
Account: 10,953
Merchandise Inventories
Explanation:

to reduce the cost of testing for the existence of account items and only
low competent evidence is available to test the valuation of account items.
335
Account:
Refundable income taxes
Explanation:

to reduce the cost of evidence necessary to test account items.
Account: 1,328
Deferred income taxes
Explanation:

2,801
Account:
Prepaid Expenses and other current assets

Explanation:

4,635
Account:
Accounts Payable
Projected: 62,800 Actual: 58, 165
Explanation:
since only moderately competent evidence is available to establish the
completeness of account items.
21,025
Account:
Property and Equipment
Explanation:
Reference: G 7
Anne Aylor, Inc. Prepared by: _______
Planning Materiality Financial Information
Year Ended: January 31, 2015 Date: _11/21/6_
Reviewed by: ______
References
Beasley, M. S. (2006). Auditing cases: An interactive learning approach. Upper Saddle
River, NJ: Pearson/Prentice Hall.

Running Head: Case 7.1 Anne Aylor, Inc. 1

Uploaded by

Copyright:

Available Formats

Running Head: Case 7.1 Anne Aylor, Inc. 1

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Running Head: Case 7.1 Anne Aylor, Inc. 1

Uploaded by

Copyright:

Available Formats

Running head: Case 7.1 Anne Aylor, Inc.

Case 7.1 Anne Aylor, Inc.

November 21, 2016

Mr. Allan Foster

Anne Aylor, Inc.

and firm's assets, rather than other financial metrics.

in assets for an e-commerce retailer vs a brick and mortar.

Net income 103,900 2.0% $ 2,078 7% $ 7,273

D. Why is the risk of management fraud considered when determining performance

The risk of management fraud is considered when determining performance materiality

materiality may need to be applied.

of account balance for all financial statement accounts?

An auditor may use different performance materiality amounts or percentages for

exceed the estimate of planning materiality?

exceed the following:

 25% of planning material if moderate likely hood of management fraud.

 50% of planning materiality if reasonably low likely hood of management fraud.

 75% of planning materiality if there was low likely hood of management.

Planning materiality constitutes financial statement misstatement or neglect that could

complete audit schedules G-5, G-6 and G-7.

Anne Aylor, Inc. Reference: _________G5_________________

Primary Users of Financial Statements (list):

Employees, suppliers, lenders, customers, and stockholders.

Materiality Bases (in thousands):

Planning Materiality (in thousands):

Anne Aylor, Inc. Reference: G6_____________________

Reviewed by: __________________________

Likelihood of Management Fraud (check one):

Tolerable Misstatement (in thousands):

Specific Accounts Requiring Lower Tolerable Misstatement:

A low tolerable misstatement ( TM ) is assigned relative to the account

Projected: 13,900 Actual: 12,892

A high tolerable misstatement is assigned relative to the account balance

A high tolerable misstatement is assigned relative to the account balance

Projected: 4,500 Actual: 4,165

A high tolerable misstatement is assigned relative to the account balance

A high tolerable misstatement is assigned relative to the account balance

Projected: 38,000 Actual: 35,199

A high tolerable misstatement is assigned relative to the account balance

Projected: 62,800 Actual: 58, 165

Projected: 275,500 Actual: 254,475

Beasley, M. S. (2006). Auditing cases: An interactive learning approach. Upper Saddle

River, NJ: Pearson/Prentice Hall.

You might also like

Anne Aylor, Inc. Reference: _G5_________