Reference no: EM133378972
Determining Materiality Thresholds Background The audit firm of DCG, LLP is performing an audit of Argo Co., a publicly traded company, for the year ended December 31, 2014. You have been given the assignment of assisting in the planning process for the audit by determining appropriate benchmarks and percentages to be used for overall planning materiality and for performance materiality. You have also been tasked with evaluating audit evidence upon completion of audit procedures to determine whether or not projected misstatements are deemed to be material. In researching your firm's guidance on establishing overall planning and performance materiality (see the "Argo Co. DGC Policies and Procedures" document), you learn that both quantitative and qualitative factors should be considered in materiality judgments. As such, you perform some preliminary research and identify the following qualitative factors that may be relevant to your materiality judgments: Argo's Vice President of Sales (VP-Sales) earns a $50,000 bonus if Argo's 2014 sales are at least $25,120,000. The analyst's consensus forecast for Argo's 2020 pre-tax income is $6,050,500. In the audit of the 2013 financial statements, Argo's external auditors determined that a material weakness in internal controls existed with relation to controls over land acquisitions and disposals.
Since the determination of overall planning materiality occurs before year end, DCG has computed projections of key financial statement balances for the purpose of determining overall planning materiality. The computed projections, as well as prior-year actual balances, are as follows:
| Account |
12/31/2014 Balance (projected) |
12/31/2013 Balance (audited) |
12/31/2012 Balance (audited) |
| Sales |
$25,354,128 |
$22,122,039 |
$23,346,943 |
| Total Assets |
$19,885,320 |
$17,336,809 |
$18,204,143 |
| Gross Profit |
$12,409,357 |
$10,819,457 |
$11,236,851 |
| Pre-Tax Income |
$6,423,040 |
$5,615,674 |
$5,881,853 |
Requirement #1:
Review DCG's policies and procedures pertaining to overall planning and performance materiality. The firm's guidance is found in a file attached to this case (Argo Co. DCG Policies and Procedures document.pdf).
Requirement #2:
Using information from the case and from the DCG Policies and Procedures file, complete Work Paper (WP) 2-1 in the attached Excel file (Argo Co. Materiality Workpapers.xlsx) to document your calculation of overall planning materiality for the engagement. The work paper serves an important documentation role; as such, make sure to perform each of the following steps:
a. Identify and select the most appropriate financial statement benchmark for establishing overall planning materiality. Briefly justify your selection in the text box provided.
b. Select and document an appropriate materiality factor (percentage) for determining overall planning materiality. Briefly justify your selection in the text box provided in the work paper.
c. Verify the accuracy and appropriateness of the Computed Overall Planning Materiality for the engagement. Record your initials in the heading of the work paper to establish responsibility for the work paper and its contents.
Requirement #3:
Using your calculations from the previous tasks and the guidance in DCG's Policies and Procedures document, complete Work Paper (WP) 2-2 to document the maximum threshold for performance materiality and to determine appropriate levels of performance materiality to be applied to each of the listed accounts. Ensure that you complete each of the following steps:
a. Select and document an appropriate performance materiality factor for each of the listed accounts. Justify your selections for each account in the provided text boxes.
b. Verify the accuracy and appropriateness of the Total Performance Materiality Assigned. Record your initials in the heading of the work paper to establish responsibility for the work paper and its contents.