Claytonhill Beverages Ltd. is 100 percent owned by Buzz Bottling. While the company has in the past been profitable, it incurred a loss for the year ended December 31, 2016. The parent company, Buzz Bottling, has indicated that if Claytonhill incurs another loss, it will put the subsidiary up for sale. In response, Claytonhill is looking to expand its market share and therefore its profitability by performing private labelling for a nationwide supermarket chain, ValueFoods Inc. Private labelling involves producing and packaging pop and other non-alcoholic beverages under the ValueFoods label. However, in order to proceed with this endeavour, Claytonhill needs a packaging facility dedicated exclusively to copacking. To finance this expansion, the company has applied to the Better Business Bank for financing. The bank has indicated that before it will approve the loan application it would like to see audited financial statements for 2016. It also wants to ensure the entity has a current ratio of 2:1. Claytonhill Beverages has provided you, their new auditor, with the draft (unaudited) financial statements in Figure 4.10: 

Required 

(a) Identify the users of the financial statements and their needs. 

(b) Given the users’ needs, what is the most appropriate base for materiality? 

(c) Calculate the three levels of materiality and conclude on each.

(d) What impact did audit risk have on the materiality calculation?

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Income Statement for the Year Ended December 31, 2016 (partial) Revenue Sales Cost of goods sold Gross margin 2,057,505 1,445,450 612,055 Less: General and administration costs (including bonuses of $100,000) 775,899 (163,844) Net income before tax Assets Current assets Total cash 179,825 Accounts receivable, net 64,475 Prepaid expenses Inventory 3,004 1,507,413 Total current assets 1,754,717 Capital assets Office furniture and equipment, net Building, net Land 85,106 964,224 2,004,933 3,054,263 Total capital assets 4,808,980 Total assets Liabilities Current liabilities Accounts payable Other accrued expenses Warranty provision Current portion long-term debt 799,255 44,875 9,456 25,000 878,586 Total current liabilities Long-term liabilities 2,200,000 2,200,000 Bank loans Total long-term liabilities 3,078,586 Total liabilities Equity Common shares 248,000 1,482,394 1,730,394 Retained earnings Total equity Liabilities and Equity 4,808,980