1. Benchmark Data Sales / Revenue Pre-tax income Total assets Materiality EARTHWEAR CLOTHIERS Planning Materiality December 31, 2019 (In thousands) Unaudited 2019 2. Establish Planning Materiality Level Measurement Base Pre-tax income Percentage Applied* Planning Materiality Bases and Percentage Ranges: Profit Oriented Entities Pre-tax income Total Revenue Total Assets 3-7%* 0.5-3% 0.25-2% * For public companies, 5% is typically the maximum. Not-for-Profit Entities Total Revenue 0.5-3% 2018 $1,019,890 $950,484 $70,154 $35,757 $389,428 $329,959 $1,800 70,154 4.5% $3,157 3-7 Initial Here 1/20/2022 Please use this template in conjunction with Willis & Adams Materiality Guidelines. The materiality factors provided are guidelines only and should be used only as an aid as you use professional judgment to determine planning materiality. Not-for-Profit Entities Total Revenue Total Assets Mutual Fund Entities Net Asset Value 0.5-3% 0.25-2% 3-5% 3. Justify/Support Your Level of Planning Materiality State the factors that you considered to determine the appropriate measurement base and percentage to determine planning materiality. Measurement Base: Enter your response here Percentage: Enter your response here EARTHWEAR CLOTHIERS Allocation of Materiality: Tolerable Misstatements December 31, 2019 (In thousands) Tolerable Misstatement as % of Account Name 2018 Cash and cash equivalents Receivables, net $48,978 $12,875 2019 Unaudited Trial Balance $79,359 Tolerable Misstatement Planning Materiality Account Balance ** Explanation $1,587 50% 2% $8,643 $1,577 50% 18% Inventory Prepaid expenses $122,337 $147,693 $2,368 75% 2% Large and complex account with misstatements expected, costly to audit $17,772 $15,647 $1,565 50% 10% Deferred income tax benefits $7,132 $10,338 $2,368 75% 23% Property, Plant, & Equipment $206,426 $223,736 $1,578 50% 1% Relatively complex, estimation involved, related to Deferred Income Taxes Relatively little change from prior year, not difficult to audit Accumulated depreciation and amortization $85,986 $97,722 $2,368 75% 2% Intangibles, net $423 $1,734 $173 5% 10% Lines of credit $11,011 $10,510 $1,578 50% 15% Relatively little volume, not difficult to audit via 3rd party info Accounts payable & Reserve for returns $68,399 $60,286 $2,368 75% 4% Accrued liabilities & Accrued profit sharing $28,270 $33,600 $2,368 75% 7% Income taxes payable & Deferred income taxes $18,057 $24,567 $2,368 75% 10% Common stock, 26,121 shares issued $261 $261 $65 2% 25% No change from prior year, easily verified Donated capital $5,460 $5,460 $1,365 43% 25% No change from prior year, easily verified Additional paid-in capital $20,740 $25,719 $1,578 50% 6% Little change from prior year, not difficult to audit Deferred compensation ($79) Accumulated other comprehensive income $3,883 Retained earnings $317,907 ($36) $2,173 $361,402 $0 0% 0% $543 17% 25% Not difficult to audit, examine current year vesting activity Involves some complex applications of GAAP Treasury stock, 6,546 and 6,706 shares at cost, respectively ($143,950) ($134,512) Not Applicable $1,579 Not Applicable Not Applicable 50% Not Applicable 1% Little change from prior year, not difficult to audit 3-8 Initial Here 1/20/2022 Total Amount of Tolerable Misstatement Allocated To Balance Sheet Accounts Planning Materiality (from work paper 3-7) Ratio of Total Tolerable Misstatement to Planning Materiality* $27,396 $3,157 8.7 Willis & Adams Tolerable Misstatement Guidelines Tolerable misstatement should be between 50% and 75% of planning materiality. Tolerable misstatement should not exceed 25% of the account balance *** The total amount of tolerable misstatement allocated to balance sheet accounts should be below ten times materiality in order to limit aggregation risk