ABCD produces robotic parts for the food manufacturing industry. It is a private company, owned by two equal shareholders: Imaan and Sofia. They started the company in 2015 and were initially quite successful. The robotics parts are challenging to develop and if manufactured improperly, due to the nature of the use (food manufacturing), could result in significant liability if the parts manufactured by the company are found to be the cause of food contamination.In fact, one of their major customers is currently investigating the cause of contamination in one of their food production facilities. It is unknown whether there will be liability related to ABCD as a result of the investigation.

In recent years, the business has had it's struggles.There is more competition and they are finding it more difficult to retain key staff.Imaan and Sofia are finding themselves more involved in the business over the 18 months. They are now directly performing accounting and finance functions as most of the turnover has been within the accounting team.

They have made the difficult decision to sell the business this year, especially before either the potential liability becomes reality.They have an interested buyer. Audited financial statements are a requirement of the loan agreement for the buyer.

Your audit firm has been appointed the new auditor this year. Robotics is a specialized field and your firm is excited to work with a new type of company despite not having any IT or engineering specialists in the firm. The previous auditor was a small local firm and the owner retired last year after a disciplinary hearing regarding inapproriate professional behaviour unsuitable for CPAs. The following are the figures from the client's financial statements for the current and previous year:

Current Year Previous Year

Sales $ 1,481,984 $ 2,469,974

Cost of sales 711,353 1,259,687

Gross Margin 770,631 1,210,287

Operating Expenses565,643 915,203

Net Income 204,988 295,084

Partial Balance Sheet:

Current Year Previous Year

Cash $207 $145,768

Receivables 123,499 411,662

Inventories 47,424 104,974

Prepaid Expenses 2,500 55,678

Property Plant and Equipment 1,111,739 1,445,260

Total Assets $1,285,369 $2,163,342

Required:

PART A: Materiality - This part is worth 6 marks

1. Who are the users that should be considered when determining materiality and what are their needs? (2 marks)

2. Which of the following base (benchmark) of materiality would you use and why? (2 marks - be sure to consider both quantitative and qualitative factors)

• Current Year Assets
• Current Year Net Income
• Current Year Sales
• Previous Year Sales
• Previous Year Net Income
• An average of assets and sales

3. Calculate materiality based on your response to question 2 and show your work. (2 marks)