Pamela Albright is the manager of the audit of Stanton Enterprises, a public company that manufactures formed steel subassemblies for other manufacturers. Albright is planning the 2015 audit and is considering an appropriate amount for overall financial statement materiality, what performance materiality should be set for the financial statement accounts, and the appropriate inherent risks. Summary financial statement information is shown in Figure 7-6 . Additional relevant planning information is summarized next.

1. Stanton has been a client for four years and Albright's firm has always had a good relationship with the company. Management and the accounting people have always been cooperative, honest, and positive about the audit and financial reporting. No material misstatements were found in the prior year's audit. Albright's firm has monitored the relationship carefully, because when the audit was obtained, Leonard Stanton, the CEO, had the reputation of being a "high-flyer" and had been through bankruptcy at an earlier time in his career.

2. Stanton runs the company in an autocratic way, primarily because of a somewhat controlling personality. He believes that it is his job to make all the tough decisions. He delegates responsibility to others but is not alwayswilling to delegate a commensurate amount of authority.

3. The industry in which Stanton participates has been in a favourable cycle for the past few years, and that trend is continuing in the current year. Industry profi ts are reasonably favourable, and there are no competitive or other apparent threats on the horizon.

4. Internal controls for Stanton are evaluated as reasonably effective for all cycles but not unusually strong. Although Stanton supports the idea of control, Albright has been disappointed that management has continually rejected Albright's recommendation to improve its internal audit function.

5. Stanton has a contract with its employees that if earnings before taxes, interest expense, and pension cost exceed $7.8 million for the year, an additional contribution must be

made to the pension fund equal to 5 percent of the excess.

REQUIRED

a. You are to play the role of Pamela Albright in the December 31, 2015, audit of Stanton Enterprises. Make a preliminary judgment of materiality and determine performance materiality for the financial statement accounts. Prepare an audit schedule showing your calculations.

b. Make an acceptable audit risk decision for the current

year as high, medium, or low, and support your answer.

c. Perform analytical procedures for Stanton Enterprises that will help you identify accounts that may require additional evidence in the current year's audit. Document the

analytical procedures you perform and your conclusions.

d. The evidence planning worksheet to decide tests of details of balances for Stanton's accounts receivable is shown in Figure 7-7 . Use the information in the case and your conclusions in parts (a) through (c) to complete the following rows of the evidence planning worksheet: acceptable audit risk; inherent risk; and analytical procedures. Also fill in performance materiality for accounts receivable at the bottom of the worksheet. Make any assumptions you believe are reasonable and appropriate and document them.

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Figure 7-6 Stanton Enterprises Summary Financial Statements Stanton Enterprises Summary Financial Statements Balance Sheet Preliminary Dec. 31, 2015 Audited Dec. 31, 2014 $ 243 689 Cash 133 981 2 224 921 Trade accounts receivable 3544 009 (215 000) 3 888 400 Allowance for uncollectible accounts (120 000) 4520 902 Inventories Prepaid expenses 29 500 24 700 8 218 100 6 057 002 Total current assets Property, plant, and equipment: At cost 9 922 534 (3 775 911) 6 146 623 12 945 255 Less accumulated depreciation Total prop., plant, and equipment Goodwill (4 382 990) 8 562 265 1 200 000 345 000 $ 12 548 625 Total assets $17 980 365 $ 2 141 552 $ 2 526 789 Accounts payable Bank loan payable 150 000 Accrued liabilities 723 600 598 020 Federal income taxes payable Current portion of long-term debt Total current liabilities 1 200 000 1 759 000 240 000 240 000 4 455 152 5 123 809 Long-term debt Shoulders' equity: Common shares 960 000 1 200 000 1 000 000 1 250 000 Additional paid-in capital Retained earnings Total shareholders' equity Total liabilities and shareholders' equity 2 469 921 1 333 801 8 845 292 3 891 015 6 224 816 $12 548 625 12 565 213 $17 980 365