Reference no: EM133392299
You, CPA, as the Senior Auditor for the MMC financial statement audit engagement for the year ended March 31, 2020 met with the Audit Partner prior to beginning audit fieldwork. The Audit Partner has asked you to preparea memo regarding materiality for the March 31, 2020 year-end audit. Specifically, the Audit Partner is interested to know who the primary users are for the financial statements, the overall materiality and performance materiality for the audit. She has requested you incorporate both quantitative and qualitative analysis supporting your assessment of materiality levels.
Background Information:
MMC is a profit-oriented company and follows International Reporting Standards (IFRS). MMC is a privately owned business, however there is a possibility that the company may go public in the future.
During the fiscal year, MMC obtained a new bank loan. MMC obtained a bank loan of $5,000,000 to help with their international expansion and to fund a new marketing campaign. The bank is concerned with the profitability of MMC and is eager to see the audited financial statements due to the new loan granted during the year.
The owners of MMC, Mike and Emily, were in discussions with a competitor 3 years ago about the potential of selling the business. Mike and Emily decided not to sell at that time, however they have thought about selling sometime in the near future if the day-to-day demands of running the business become too much to handle. Based on your knowledge of the industry, businesses of this nature are typically valued based on annual profitability.
MMC Director of Finance has provided you with extracts from the draft financial statements (unaudited) for the year ended March 31, 2020.
APPENDIX: EXTRACTS FROM FINANCIAL STATEMENTS:
Extract from Income Statement:
Revenue: $3,000,000
Cost of Goods Sold: (2,200,000)
Gross Profit: 800,000
Selling, General and Admin Expense: (500,000)
Operating Income: 300,000
Interest Expense: (50,000)
Earnings from Continuing Operations Before Income Taxes: 250,000
REQUIRED:
1- Calculate Overall Planning Materiality. Provide both quantitate and qualitative analysis supporting your assessment of the materiality level.
4. Calculate Performance Materiality. Provide both quantitate and qualitative analysis supporting your assessment of the materiality level.