Anne Aylor, Inc. (Anne Aylor) is a leading national specialty retailer of high-quality women’s apparel, shoes, and accessories sold primarily under the “Anne Aylor” brand name. Anne Aylor is a highly recognized national brand that defines a distinct fashion point of view. Anne Aylor merchandise represents classic styles, updated to reflect current fashion trends. Company stores offer a full range of career and casual separates, dresses, tops, weekend wear, shoes and accessories coordinated as part of a total wardrobing strategy. The company places a significant emphasis on customer service. Company sales associates are trained to assist customers in merchandise selection and wardrobe coordination, helping them achieve the “Anne Aylor” look while maintaining the customers’ personal styles.

The company follows the standard fiscal year of the retail industry, which is a 52- or 53- week period ending on the Saturday closest to January 31 of the following year. Net revenue for the year ended February 1, 2018 (referred to as fiscal 2018) was $1.2 billion and net income was $50.8 million.

At the end of fiscal 2018, the company operated approximately 584 retail stores located in 46 states under the name Anne Aylor. The company’s core business focuses on relatively affluent, fashion-conscious professional women with limited shopping time. Substantially all of the company’s merchandise is developed in house by its product design and development teams. Production of merchandise is sourced to 131 independent manufacturers located in 19 countries. Approximately 45 percent, 16 percent, 13 percent, 12 percent, and 9 percent of the company’s merchandise is manufactured in China, Philippines, Indonesia, India, and Vietnam, respectively. Merchandise is distributed to the company’s retail stores through a single distribution center, located in Louisville, Kentucky.

Anne Aylor stock trades on The New York Stock Exchange and Anne Aylor is required to have an integrated audit of its consolidated financial statements and its internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). As of the close of business on March 14, 2018 Anne Aylor had 48,879,663 shares of common stock outstanding with a trading price of $22.57.

REQUIRED 

[1] Review Exhibits 1 and 2; audit memos G-3 and G-4; and audit schedules G-5, G-6 and G-7. Based on your review, answer each of the following questions: 

[a] Why are different materiality thresholds relevant for different audit engagements? 

[b] Why are different materiality bases considered when determining planning materiality? 

[c] Why is the materiality base that results in the smallest threshold generally used for planning purposes? 

[d] Why is the risk of management fraud considered when determining performance materiality? 

[e] Why might an auditor not use the same performance materiality amount or percentage of account balance for all financial statement accounts? 

[f] Why does the combined total of individual account performance materiality commonly exceed the estimate of planning materiality? 

[g] Why might certain trial balance amounts be projected when considering planning materiality? 

[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.

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This policy statement provides general guidelines for firm personnel when establishing planning materiality and performance materiality for purposes of determining the nature, timing, and extent of audit procedures. The intent of this policy statement is not to suggest that these materiality guidelines must be followed on all audit engagements. The appropriateness of these materiality guidelines must be determined on an engagement by engagement basis, using professional judgment. EXHIBIT 1 Smith and Jones, PA. Policy Statement: Planning Materiality Planning Materiality Guidelines 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. The magnitude and nature of financial statement misstatements or omissions will not have the same influence on all financial statement users. For example, a 5 percent misstatement with current assets may be more relevant for a creditor than a stockholder, while a 5 percent misstatement with net income before income taxes may be more relevant for a stockholder than a creditor. Therefore, the primary consideration when determining materiality is the expected users of the financial statements. Relevant financial statement elements and presumptions on the effect of combined misstatements or omissions that would be considered immaterial and material are provided below: . Net Income Before Income Taxes - combined misstatements or omissions less than 2 percent of Net Income Before Income Taxes are presumed to be immaterial and combined misstatements or omissions greater than 7 percent are presumed to be material. (Note: Net Income Before Income Taxes may not be an appropriate base if the client's Net Income Before Income Taxes is substantially below other companies of equal size or is highly variable.) • Net Revenue-combined misstatements or omissions less than 0.5 percent of Net Revenue are presumed to be immaterial, and combined misstatements or omissions greater than 2 percent are presumed to be material. • Current Assets-combined misstatements or omissions less than 2 percent of Current Assets are presumed to be immaterial, and combined misstatements or omissions greater than 7 percent are presumed to be material. . Current Liabilities - combined misstatements or omissions less than 2 percent of Current Liabilities are presumed to be immaterial and combined misstatements or omissions greater than 7 percent are presumed to be material. ▪ Total Assets - combined misstatements or omissions less than 0.5 percent of Total Assets are presumed to be immaterial, and combined misstatements or omissions greater than 2 percent are presumed to be material. (Note: Total Assets may not be an appropriate base for service organizations or other organizations that have few operating assets.) The specific amounts established for each financial statement element must be determined by considering the primary users as well as qualitative factors. For example, if the client is close to violating the minimum current ratio requirement for a loan agreement, a smaller planning materiality amount should be used for current assets and liabilities. Conversely, if the client is substantially above the minimum current ratio requirement for a loan agreement, it would be reasonable to use a higher planning materiality amount for current assets and current liabilities. Planning materiality should be based on the smallest amount established from relevant materiality bases to provide reasonable assurance that the financial statements, taken as a whole, are not materially misstated for any user.