Panzero Bread is a major retailer of specialty sandwich items and baked goods. The following information represents the company's financial position as of 12/31/10 and

The auditor of Panzero Bread identifies the company as possessing high audit risk and has set the posting thresholds for individual accounts at 10% of overall financial statement materiality levels. The auditors have detected an overstatement of accounts receivable of $345,000. The misstatement is not a surprise to the auditors, as they have detected misstatements in this account in the past.
On a per share basis, the misstatement represents $0.01 of earnings per share. The auditor believes that the misstatement should be corrected. Management argues strongly that they prefer not to make the correction because they do not believe it is material; that is, the misstatement represents just over 1% of the account balance. Although left unsaid, the auditor knows that management is under considerable pressure from Wall Street to meet analyst expectations for earnings per share. Reducing earnings per share by even $0.01 would cause the trend in earnings to become even more negative than the unaudited financial numbers already reveal, and it would cause the company to just miss analyst forecasts for earnings per share.
Required
a. Use the three common benchmarks for making materiality judgments (i.e., net income, total assets, and net sales) to establish materiality for the financial statements overall.
b. What difficulties does the auditor face when the alternative benchmarks yield differing conclusions about materiality? What qualitative factors should the auditor consider in making its materiality judgment in that case?
c. Articulate a reason for choosing one particular benchmark among the three calculated in part (a), and use that to calculate the posting threshold for the inventory account.
d. What effect will the qualitative factors in this case have on the auditor's posting threshold for the inventory account?
e. Use the decision framework from Chapter 3 to make a recommendation about how the auditor should resolve the dispute with management regarding whether or not to correct the misstatement. Recall that the framework is as follows:

Adapted from "Judgment and Choice," by Robin Hogarth.

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12/31/10 (unaudit ed) 12/31/09 (audited) Total assets Accounts receivable Total sales Cost of goods sold Net income Eamings per share $698,752,000 $25,152,000 $1,066,691,000 $842,255,000 $57,456,000 $1.81 $542,609,000 $19,041,000 $828,971,000 $628,534,000 $58,849,000 $1.88 1. Structure the audit problem 2. Assess consequences of decision 3. Assess risks and uncertainties of the audit problem information/audit evidence- alternatives 5. Conduct #1.iinily analysis information/audit evidence 7. Make audit problem