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Case 7.1 Anne Aylor

Patricia Cadle, Bethany Herman, Rachell Gibson, Cynthia Sanders

ACC/546

August 14, 2017

Eddie Loussararian
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Case 7.1 Anne Aylor

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[A] The reason for different materiality bases when determining planning materiality is

because there are specific amounts for the elements of every financial statement which is figured

by the primary user as well as qualitative factors. While doing an audit, you find a client is near

infringing on the minimum present ratio required for a loan agreement then the lowest planning

materiality would be used for the client’s current assets and liabilities, but if higher than

minimum present ratio then a higher planning materiality amount will be used. When deciding to

use planning materiality, one must base it on the lowest amount created from the relevant

materiality bases. Per Beasey, Buckless, Glover, & Prawitt (2015), “The lower amount used is to

provide reasonable assurance that the financial statements to be considered as a whole and not

materiality misstated for any user” (Beasey, Buckless, Glover, & Prawitt, 2015).

Per Beasey, Buckless, Glover, & Prawitt (2015), “Revelent financial statement elements

and presumptions on the effect of combined misstatements or omissions that would be

considered immaterial and material include current assets, current liabilities, and total assets”

(Beasey, Buckless, Glover, & Prawitt, 2015). The current assets and current liabilities have the

same guidelines (2015) “which are combined misstatements or omissions less than two percent

of current assets are assumed to be immaterial, and combined misstatements or omissions higher

than seven percent are assumed to be material” (Beasey, Buckless, Glover, & Prawitt, 2015). Per

Beasey, Buckless, Glover, & Prawitt (2015), “The total assets include combined misstatements

or omissions less than half percent of total assets are assumed to be immaterial while combined

misstatements or omissions higher than two percent are assumed to be material” (Beasey,

Buckless, Glover, & Prawitt, 2015).

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[B] Not only is it important to create materiality for all financial statements, there should be

materiality for individual financial statement accounts too. The amounts created for individual

accounts is known as performance materiality. Performance materiality is the amount of

individual financial statement accounts which are different from the true amounts (2015)

“without affecting the fair presentation of every financial statements” (Beasey, Buckless, Glover,

& Prawitt, 2015). By creating performance materiality for certain accounts, it provides the

auditor create and execute an audit strategy for every audit cycles.

Per Beasey, Buckless, Glover, & Prawitt (2015), “To provide reasonable assurance that

the financial statements are considered whole and do not contain material misstatements,

performance materiality is created for certain financial statements, accounts, and transactions not

to exceed seventy-five percent of planning materiality” (Beasey, Buckless, Glover & Prawitt,

2015). When the percentage threshold is lower it is a result of the expectation of management

fraud increasing. There are many audits when one can expect (2015) “individual financial

statement account misstatements identified will be lower than the performance materiality and

the misstatements across each account will offset each other” (Beasey, Buckless, Glover, &

Prawitt, 2015). An example of identified misstatements includes an overstatement of net income

and identification misstatements will understate net income. Per Beasey, Buckless, Glover, &

Prawitt (2015), “The expectation is not reasonable when there is possibility of management fraud

to be high” (Beasey, Buckless, Glover, & Prawitt, 2015).

However, when management intentionally tries (2015) “to misstate the financial

statements it is likely such misstatements will be systematically biased in one direction across

accounts” (Beasey, Buckless, Glover, & Prawitt, 2015) The performance materiality percentage

thresholds should not exceed seventy five percent of planning materiality if there is a (2015)
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“low risk of management fraud; fifty percent if there is a significant low risk of management

fraud; and twenty five percent planning materiality if there is a slight risk of management fraud”

(Beasey, Buckless, Glover & Prawitt, 2015). Of course, (2015) “a lower performance materiality

could be required for certain accounts due to the relevance of the account to users” (Beasey,

Buckless, Glover, & Prawitt, 2015). Per Beasey, Buckless, Glover, & Prawitt (2015), “The

performance materiality for a certain account need not exceed the amount that would influence

the decision of reasonable users” (Beasey, Buckless, Glover, & Prawitt, 2015).

[C] The smallest base that can be used to determine materiality is implemented by using the

net income before income taxes. This method is one that is frequently used because the net

income line is at the bottom of the income statement and will typically be smaller than most

balance sheets accounts. When the paperwork for the planning materiality threshold is complete,

it is validated by using the net income before taxes as seen 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] Management fraud risk must be considered when investigating performance materiality

because the management team may have been aware or privy to various material thresholds and

could have used multiple accounts to enhance financial documents and make the company look

more profitable than it really is. More performance materiality will need to be applied if there is

a high risk of management fraud.

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[E] An Auditor may not use the same performance materiality amount for all financial

statement accounts because there may be cases where account balances, specific transactions or

disclosures are impacted by misstatements that have materiality levels less than that used for

whole financial statements. It is important to remember that although there is little guidance on

how to calculate performance materiality, auditing is not science but an art meaning professional

judgment is vital.

[F] The combined total of individual account performance materiality often exceeds the

estimate of planning materiality because it is questionable that an account misstatement will be

for the full amount of performance materiality and that there is a possibility that account

misstatements may offset each other.

[G] Certain trial balance amounts might be projected when considering planning materiality

because “planning materiality represents the maximum, combined financial statement

misstatement or omission that could occur before influencing the decisions of reasonable

individuals relying on the financial statements” (Beasey, Buckless, Glover & Prawitt, 2015).

Therefore, the auditor will likely need to make some early projections about the amounts in

certain trial balances that are unknown or will likely change due to certain circumstances to

determine what accounts may need to be included in their audit.

2.

Anne Aylor, Inc. Reference: _G5_

Planning Materiality Assessment Prepared by: ___PC_
Year Ended: January 31, 2015 Date: _08/14/2017__
Reviewed by:
_____
Primary Users of Financial Statements (list):
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Per Bragg (2014), “Company management, competitors, customers, employees, governments,

investment analysts, investors, lenders, rating agencies, suppliers and unions” (Bragg, 2014).

Materiality Bases (in thousands):

Base Fiscal 2014 Fiscal 2015 Planning Materiality Levels

Actual Projected
Financial Financial Lower Limit Upper Limit
Statement Statement
Amounts Amounts Dollar
Percent Amount Percent Dollar
Amount
Before $84,463.00 $103,900.00 2 $2,078.0 7 $7,273.00
Taxes
Income 0
Net $1,243,788 $1,305,600 0.5 $6,528.0 2 $26,112.00
Revenues
0
Current $189,380.0 $205,200.00 2 $4,104.0 7 $14,364.00
Liabilities
0 0
Current $322,320.0 $347,100.00 2 $6,942.0 7 $24,297.00
Assets
0 0
Total $593,255.0 $640,400.00 0.5 $3,202.0 2 $12,800.00

Assets 0 0

Planning Materiality (in thousands):

$7,237.00

Explanation: Per Beasey, Buckless, Glover, & Prawitt (2015), “As of the close of the business

on March 14, 2014 Anne Aylor had 48,879,663 shares of common stock outstanding and
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Anne Aylor stock is traded on the New York Stock Exchange with a trading price of $22.57”

(Beasey, Buckless, Glover, & Prawitt, 2015).

Anne Aylor, Inc. Reference: G6_____________________

Performance Materiality Assessment Prepared by: BH
Year Ended: January 31, 2015 Date: 08/14/2017_____________________
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: $7,273.00
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) 5,454.75

Specific Accounts Requiring Lower Tolerable Misstatement:

Account Tolerable
Cash and Equivalents Misstatement
Explanation: $8,355
Projected: $124,200 Actual: $115,845

The low tolerable misstatement (TM) is assigned based on the account

balance because the competent evidence is available for testing purposes.
Account: $1,008
Accounts Receivable
Explanation:
Projected: 13,900 Actual: 12,892

For the accounts receivable portion of the statement, a high tolerable

misstatement is assigned because there is not enough evidence to test the
valuation of the account items.
Account: 10,953
Merchandise Inventories
Explanation:
Projected: 148,600 Actual: 137,647
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For the merchandise inventories portion of the statement, a high tolerable

misstatement is assigned because it will reduce the cost of testing for
existing account items and there will only be low competent evidence to
test the valuation.
Account: 335
Refundable income taxes
Explanation:
Projected: 4,500 Actual: 4,165

For the refundable income taxes portion of the statement, a high tolerable
misstatement is assigned to reduce the cost of evidence to test the account
items.
Account: 1,328
Deferred income taxes
Projected: 17,900 Actual: 16,572

Explanation:

For the deferred income taxes portion of the statement, a high tolerable
misstatement is assigned to reduce the cost of evidence to test the account
items.
Account: 2,801
Prepaid Expenses
Projected: 38,000 Actual: 35,199

Explanation:

For the Prepaid Expenses portion of the statement, a high tolerable

misstatement is assigned to reduce the cost of evidence to test the account
items.
Account: 4,635
Accounts Payable
Projected: 62,800 Actual: 58, 165

Explanation:
For the accounts payable portion of the statement, a high tolerable
misstatement is assigned because there will only be moderately competent
evidence available to establish how complete the account items are.
Account: 21,025
Property and Equipment
Projected: 275,500 Actual: 254,475

Explanation:
For the property and equipment portion of the statement, a high tolerable
misstatement is present for the account balance to reduce the cost of
evidence to test the account items.
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References

Beasey, M.S., Buckless, F.A., Glover, S.M., & Prawitt, D.F. (2015). Auditing Cases. An

interactive learning approach, 6th edition. Pearson Education.

Bragg, S. (2014). Accounting Tools. Users of financial statements. Retrieved from

https://www.accountingtools.com/articles/users-of-financial-statements.html

Perry, L. (2014). Auditing Special Purpose Frameworks: Materiality Levels. Accounting Web.

https://www.accountingweb.com/aa/auditing/auditing-special-purpose-frameworks-

materiality-levels