Quantitative and a qualitative analysis

Reference no: EM132914563

Question

You are working on the audit planning section for a new client, Ellis' Bait and Tackle Store (EBTS). EBTS is owned by Ellis Dickson who manages the store. Ellis and his sister Juliet Smith are the sole shareholders.

EBTS has a $185,000 line of credit with the Royal Bank and Ellis has recently approached the bank for an extension of the line of credit to $850,000. The bank requires borrowers to submit annual audited financial statements for borrowing in excess of $500,000.

It is now March 16, 2021. Selected financial information for EBTS for 2020, the year under audit, is as follows:

Sales: $2,100,000
Cost of Sales: $500,000
Ellis' salary: $105,000
Net income: $680,000

Other information:

-Ellis paid his staff a one time performance bonus totalling $45,000 during the year. The bonus is included in the above numbers.
-This year the company sold spare land that it purchased several years ago. The sale generated a loss of $45,000. The loss is included in the above numbers.

Required: Recommend an overall materiality threshold and a performance materiality threshold for the audit of EBTS for the year ended December 31, 2020. Justify your recommendation using botha quantitative and a qualitative analysis.

Reference no: EM132914563

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