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Calculate materiality

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Reference no: EM133153283

Question - You're the senior auditor on a new audit engagement and you're meeting with the manager at your firm tomorrow to discuss the engagement. The manager has asked you to bring along your calculation of planning materiality. The entity is a private company that is financed mainly by debt. The users of the financial statements are the company's owner, one major lender and the bank. Net income is consistently low because the owner takes most of the income as a bonus each year.

Selected financial information:

Current assets: $1,967,150

Long-term assets: 123.500

Current liabilities: 248,000

Long term liabilities: 1,700,000

Shareholder's equity: 142,650

Revenue: 1,180,860

Expenses: 1,014,370

Net earnings: $117,791

a) Which base would you use to calculate materiality? Why would you choose this base and not another common one?

b) Calculate materiality. Choose a specific number (rounded to the nearest hundred) and explain why you chose that amount.

Reference no: EM133153283

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