Elias Tech (ET) is a private company founded by Sarah House and Rosa Perks. Sara and Rosa each own a 40 percent interest in the company, with the remaining 20 percent owned by a venture capitalist firm that invests in start-ups. ET develops medical devices and has recently announced that its revolutionary blood-testing device has received government approval and will be available in the coming year. Revenue and net income information for ET’s last five years are as follows:

Earlier this calendar year, ET negotiated a $3.5 million term bank loan, which is secured by assets to expand its manufacturing facility. ET is considering going public to help fund the anticipated growth associated with its new blood-testing device and, in anticipation of this, has contracted your firm to perform the 2018 audit. A smaller public accounting firm, which does not conduct public company audits, conducted the previous years’ audits.
a. Based upon case facts, which benchmark is most appropriate for overall materiality?
i. Current year’s net income (loss)
ii. An average of the last five years’ net income (loss)
iii. An average of the last five years’ revenue
iv. An average of current year’s net assets and revenue
b. Provide an explanation for your choice.
c. What benchmark percentage is most appropriate? Use case facts to support your choice.

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Year Ended September 30 2020 (unaudited) 2019 2018 2017 2016 Revenues $ 22 000 000 24 000 000 28 000 000 26 000 000 22 000 000 Net Income (Loss) Before Income Taxes $ (200 000) (1 200 000) (900 000) (1 100 000) (800 000)