Reference no: EM133001572
Question - Stephanie Starr is an audit senior at Black & Pink LLP (Black & Pink). Stephanie was assigned to prepare the materiality analysis for K-Town Music Company Inc. (K-Town).
K-Town has a December 31 year-end. The draft income statement for K-Town is as follows:
K-Town Music Company
Draft income statement
For the year ended December 31, 2020
Revenue $1,620,429
Cost of sales 902,450
Gross profit 717,979
Advertising 85,200
General administrative (note 1) 146,000
Salaries 306,000
Income before tax 180,779
Income tax expense 45,195
Net income $135,584
Note 1: General administrative consists of office supplies and rent expense from the office.
K-Town is a privately-owned company with one shareholder. The shareholder is NOT actively involved in the business and uses K-Town as a source of income. In 2020, K-Town obtained a bank loan to finance the expansion of its business.
Required -
a) Determine the users of the financial statement and their objectives.
b) Determine an appropriate basis for the calculation of materiality.
c) Determine a range for materiality at the overall financial statement level.
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