Question: Consider how you will use the planning materiality in your audit Materiality calculation is below along with the instructions from the case

Context: Planning materialitybackground info

W&S Partners' audit methodology dictates that one planning materiality (PM) amount is to be used for the financial statements as a whole. Further, only one basis should be selecteda blended approach or average should not be used. The basis selected is the one determined to be the key driver of the business.

W&S Partners uses the following percentages as starting points for the various bases.

These starting points can be increased or decreased by taking into account qualitative client factors, which could be:

• the nature of the client's business and industry (such as rapid change, either through growth or downsizing, or unstable environment)
• the fact that it is a publicly listed entity (or subsidiary of) subject to regulations
• the knowledge of or high risk of fraud.

base

Threshold (%)

Profit before tax

5.0

revenues

0.5

Gross profit

2.0

Total assets

0.5

Equity

1.0

Typically, profit before tax is used; however, it cannot be used if the entity is reporting a loss for the year or if profitability is not consistent.

When calculating PM based on interim figures, it may be necessary to annualize the results. This allows the auditor to properly plan the audit based on an approximate projected year-end balance. Then, at year end, the figure is adjusted, if necessary, to reflect the actual results.

Note: Adjustments to the starting points are made by an experienced auditor using their professional judgement. The aim is to set PM at a high enough level that appropriately balances the amount of testing, while still keeping the audit risk to an acceptable level.

Performance materiality

W&S Partners also dictates that performance materiality be determined for each audit engagement. Performance materiality is an amount less than planning materiality that reduces the likelihood that any uncorrected and undetected misstatements within a class of transactions, account balances, or disclosures in aggregate exceed overall planning materiality. W&S Partners' policy is to use 70 percent of planning materiality to determine performance materiality.

Required

Using the working paper provided (A2-1):

• Select the basis for planning materiality that you believe is most appropriate. Justify your selection.
• Calculate the PM using the December 31, 2020, trial balance and draft Statement of Income in Appendix 2.
• Based on your determination of PM, calculate and conclude on performance materiality.

Answered Questions

Users Financial statement area of most concern to the user Base selected for planning materiality (PM): ______Revenue________________________________

Justification for selection:

Net Income before tax can not be used as Cloud 9 Ltd year end is negative so no appropriate to use

Management may manipulate the financial results specifically the revenues side for their own benefit because if growth targets are met that equals more compensation for management.

Cloud 9 Inc (parent company) wants Cloud 9 Ltd to increase its market share in Canada therefore revenues will need to improve.

Calculation of PM

Current year

Prior year

Trial balance amount

$81,132,724

$76,657,825

Normalizing adjustments (that is, non-recurring items)

0

0

Annualized (if required)

Full year

Full year

Benchmark applied

0.5% (Revenues)

Calculated materiality

$81,132,724 x 0.5%=

$405,663.62

Conclusion: PM materiality is

$405,664

Performance materiality: 70% x

$405,664 x 70%=

$283,964.8

conclusion :

performance materiality is

$283,965

Question based on this, how do you use planning materiality in the audit