E4-15A. (Learning Objective 2: Understanding materiality) Insignia is a company with total assets of $500,000, total revenue of $800,000, gross profit of $300,000, and net profit of $100,000 in its last financial year, 20X5. Which of the following items are likely to be material for Insignia?

a. There was an error in the calculation of commission payable to employees amounting to

$2,200 in 20X4. The additional payments were made in 20X5, but the 20X4 comparatives on the financial statement were not adjusted for this error.

b. Insignia has erroneously recognized revenue for items that have not yet been shipped to customers at the end of 20X5, amounting to $28,000.

c. Insignia suffered a major flood in one of its largest warehouses in September 20X5.

Insignia did not recognize or disclose the losses it suffered because it was in the process of making claims to its insurance company. In early 20X6, before the issuance of the annual report, the insurance company paid the claims in full.

d. Insignia sold an old factory to another company. The buyer was going to demolish the factory and build a hostel on the site. However, the buyer failed to secure permission to build the hostel because the grounds showed higher levels of toxicity than allowed. The buyer claimed this is due to Insignia’s failure to meet environmental regulations on disposal of industrial waste in the past. The buyer is now suing Insignia for damages, expected to be in the millions. Insignia believes this lawsuit is baseless and would vigorously defend the case in court. It did not mention this lawsuit in its annual report.