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.

Data from in figure 7-7

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
 there 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.
b. 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 electronicn spreadsheet to calculate analytical procedures.)

Transcribed Image Text:

Figure 7-7 Stanton Enterprises Summary Financial Statements Stanton Enterprises Summary Financial Statements Cash Trade accounts receivable Allowance for uncollectible accounts Inventories Prepaid expenses Total current assets Property, plant, and equipment: At cost Less accumulated depreciation Total prop., plant, and equipment Goodwill Total assets Accounts payable Bank loan payable Accrued liabilities Federal income taxes payable Current portion of long-term debt Total current liabilities Long-term debt Shoulders' equity: Common shares Additional paid-in capital Retained earnings Total shareholders' equity Total liabilities and shareholders' equity Balance Sheet Preliminary Dec. 31, 2020 $ 243 689 3544 009 (120 000) 4520 902 29 500 8 218 100 12 945 255 (4 382 990) 8 562 265 1 200 000 $17 980 365 $ 2141 552 150 000 723 600 1 200 000 240 000 4 455 152 960 000 1 250 000 2 469 921 8 845 292 12 565 213 $17 980 365 Audited Dec. 31, 2019 $ 133 981 2 224 921 (215 000) 3 888 400 24 700 6 057 002 9 922 534 (3 775 911) 6 146 623 345 000 $ 12 548 625 $ 2 526 789 598 020 1 759 000 240 000 5 123 809 1 200 000 1 000 000 1 333 801 3 891 015 6 224 816 $12 548 625