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 2018 audit and is considering an appropriate amount for overall financial statement materiality, what performance materiality should be set, and the appropriate inherent risks at the account/assertion level. Summary financial statement information is shown in Figure 7-7. 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 always willing 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 profits 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, 2018, audit of Stanton Enterprises. Make a preliminary judgment of materiality and determine performance materiality. 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. (Instructor option: Use an electronic spreadsheet to calculate analytical procedures.)

d. The evidence planning worksheet to decide tests of details of balances for Stanton?s accounts receivable is shown in Figure 7-8. 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 for accounts receivable; 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 7-7 Stanton Enterprises Summary Financial Statements Stanton Enterprises Summary Financial Statements Balance Sheet Audited Preliminary Dec. 31, 2018 Dec. 31, 2017 Cash 2$ 243 689 133 981 Trade accounts receivable 3544 009 2 224 921 Allowance for uncollectible accounts Inventories Prepaid expenses (120 000) 4520 902 (215 000) 3 888 400 29 500 24 700 Total current assets 8 218 100 6 057 002 Property, plant, and equipment: At cost Less accumulated depreciation Total prop., plant, and equipment Goodwill 9 922 534 (3 775 911) 6 146 623 345 000 $ 12 548 625 12 945 255 (4 382 990) 8 562 265 1 200 000 $17 980 365 Total assets $ 2 141 552 Accounts payable Bank loan payable $ 2 526 789 150 000 598 020 1 759 000 240 000 Accrued liabilities 723 600 Federal income taxes payable Current portion of long-term debt 1 200 000 240 000 Total current liabilities 4 455 152 5 123 809 1 200 000 Long-term debt Shoulders' equity: 960 000 Common shares 1 250 000 1000 000 Additional paid-in capital Retained earnings Total shareholders' equity Total liabilities and shareholders' equity 2 469 921 8 845 292 12 565 213 $17 980 365 1333 801 3 891 015 6 224 816 $12 548 625 Combined Statement of Income and Retained Earnings Preliminary Audited Dec. 31, 2018 Dec. 31, 2017 Sales $43 994 931 $32 258 015 Cost of goods sold Gross profit Selling, general, and administrative expenses Pension cost Interest expense Total operating expenses Income before taxes Income tax expense 24 197 212 19 032 229 19 797 719 13 225 786 10 592 221 8 900 432 1 117 845 865 030 83 376 104 220 11 793 442 8 004 277 9 869 682 3 356 104 1141 000 2 215 104 1 800 000 6 204 277 3 891 015 Net income Beginning retained earnings 2675 911 10 095 292 4 891 015 (1 250 000) $8 845 292 Dividends declared (1 000 000) Ending retained earnings $3 891 015 Stanton Enterprises Evidence Planning Worksheet to Decide Tests of Details of Figure 7-8 Balances for Accounts Receivable Acceptable audit risk Inherent risk Control risk-Sales Control risk- Cash receipts Control risk- Additional controls Substantive tests of transactions-Sales Substantive tests of transactions- Cash receipts Analytical procedures Planned detection risk for tests of details of balances Planned audit evidence for tests of details of balances Performance materiality Detail tie-in Existence Complete ness A ccuracy Classification Cutoff Realizable v alue Rights