The auditors were planning the work on the financial statements of the Mary Short Cosmetics Company. The unaudited financial statements showed $515,000 net income after providing an allowance of 35% for income taxes. The company had no debt and no interest expense. Mary Short’s shares are traded over the counter, and investors have generally assigned a price earnings multiple of 16 to the shares. Press releases by the company have enabled analysts to estimate the income for the year at about $515,000, which was forecast by the company at the beginning of the year.
There are 750,000 shares outstanding, and the last quoted price for them was $11.
The auditors have decided that a 6% mispricing error in the shares would not cause investors to change their buying and selling decisions.
Misstatements totaling $13,000 were discovered in the previous year’s audit but were not corrected.
Calculate the materiality for the financial statements as a whole and the performance materiality the auditors might use in the current year audit, based on the income before income taxes.