Hi! I need some help with planning MATERIALITY for auditing. How do I determine which accounts are important for Specific Accounts Requiring Lower Performance Materiality?

Assignment Two - Countryman Designs, Inc. This assignment relates to the following Course Learning Requirement (CLRs): CLR 4: Explain the audit risk model and describe how it is used to assess audit risk. Explain the concept of materiality and how an auditor uses analytical procedures to help plan the audit. Objective(s) of this Assignment: The purpose of this assignment is to: Assess your ability to determine and allocate materiality and support you reasons for your materiality. This assignment is out of 15 points and worth 15% of your final mark. Instructions: In this assignment you will be researching and preparing a complete audit schedule based on these guidelines: 1. Review the following documents (located in Blackboard): company background memo, accounting policies memo, financial information and working papers 518 and 519. 2. Based on your review, complete audit schedule 520. 3. Ensure in the planning materiality explanation section that you explain why you selected the: a. Benchmark you used to calculate materiality b. Percentage you applied to the benchmark c. Likelihood of management fraud 4. Ensure for the accounts that you identify items as requiring a lower performance materiality. 5. Explain your rationale. The only item you should submit for grading is your completed audit schedule 520. Resources: The company background memo, accounting policies memo, financial information and working papers 518 and 519 are all located on Blackboard under Assignment Two. Submission Requirements: Organization/formatting/quality: Your submission must be: 1. Typed and formatted using Microsoft Excel. 2. All areas of the audit schedule 520 have been completed accurately. 3. Correct paragraph/sentence structure, grammar, punctuation and spelling. 1 4. Properly referenced using APA standards. See the course information tab in the Blackboard site for reference to the APA standards. 5. Submitted using the Assignment section of Blackboard. No email assignments will be accepted. Note that the organization and quality of your work influences your overall mark. Assignments that are submitted incorrectly and/or do not follow the submission guidelines will be marked accordingly. Late assignment policies for this course are to be adhered to. 2 Grading Rubric (15 points): Learning Requirements Explain the audit risk model and describe how it is used to assess audit risk. Explain the concept of materiality and how an auditor uses analytical procedures to help plan the audit. Exceeds Requirements Support for all of the following: benchmark, percentage applied, and likelihood of management fraud and specific performance materiality accounts. Meets Requirements Support for some but not all of the following: benchmark, percentage applied, likelihood of management fraud and specific performance materiality accounts. Does not meet Requirements No support for benchmark chosen, percentage applied, likelihood of management fraud and specific performance materiality accounts. Grade /15 Feedback /15 Total 3 Countryman Design Inc. Extract of Accounting Policies Revenue Recognition The Company records revenue as merchandise is sold to clients. Amounts related to shipping and handling billed to clients in a sale transaction is classified as revenue and the costs related to shipping are classified as cost of goods sold. An allowance for returns is recorded when sales are recorded. Advertising All advertising costs are expensed when the ads appear in print. Direct mailing costs are expensed when mailed. Cash and Cash Equivalents Cash and short-term highly liquid investments with original maturity dates of 3 months or less are considered cash and cash equivalents. Inventory Inventory is valued at the lower of average cost or market. Inventory is marked down if the selling price is market below cost. Income Taxes The Company accounts for income taxes using the future tax method. Under the future tax method, future tax assets and liabilities are recognized, and income or expense is recorded, for the estimated future tax consequences attributable to differences between the financial statement carrying amount of existing assets and liabilities and the respective tax bases. Countryman Designs Inc. Countryman Designs Inc. is a leading Canadian retailer of plus size women's clothing. Countryman is a highly recognized Canadian brand that designs clothing for the regular woman. Countryman strives to provide the latest trends to women of all sizes. Their retail stores offer a full range of career and casual separates, dresses, tops, workout wear, shoes and accessories. They company has a December 31st year-end. Net revenue for the year-end December 31, 2014 was $1.2 billion and net income was $50.8 million. At the end of their 2015 fiscal year, the company operated 450 stores located in Canada and the United States. The vast majority of the company's merchandise is designed in house. They out source their production to 89 independent manufactures located in several countries. Approximately, 51 percent, 15 percent, 8 percent and 5 percent is produced in China, Indonesia, India and Vietnam, respectively. Merchandise is distributed to the retail stores through a single distribution center located in Toronto, Ontario. Countryman Designs' stock trades on the Toronto Stock Exchange and as a result is required to have an audit of its consolidated statements and internal controls over their financial reporting. As of close on business on January 30, 2016 Countryman had 26,867,145 shares of common stock outstanding with a trading price of $26.29. Your firm, Wheeler and Cassell LLP, is in the initial planning stage for the fiscal 2015 audit. As the audit manager, you have been assigned the responsibility of determining planning and performance materiality for the key financial statement accounts. Brooklynn Wheeler CPA, CGA, the audit partner, has performed a preliminary analysis of the company and its performance and believes the likelihood of management fraud is low. Brooklynn's initial analysis of the company's performance is documented and the company's accounting policies are documented in the attached memos. Assume no material misstatements were found during the previous year's audit. 518 BW 6/14/16 Countryman Designs Inc. Partner Analysis of First Quarter Performance 12/31/15 Net sales for the first quarter increased 1.5 percent form the same quarter last year. Store sales for the first quarter of fiscal 2015 increased by .5 percent compared to a . 2 percent decrease in same quarter last year. Based on their current strategy and performance to date the company expects to achieve a net sales increase of 5 percent for fiscal 2015 compared to 3.5 percent for fiscal 2014. Net growth in the retail market sector is expected to be 3 percent for fiscal 2015. Gross margin as a percentage of net sales increased to 51.5 percent in the first quarter of fiscal 2015, compared to 51 percent in the same quarter last year. This increase was due to a higher percentage of the sales occurring at higher full prices. Selling and admin prices as a percentage of net sales decreased to 47.2 percent, in the first quarter of 2015 compared to 48 percent in same quarter last year. Net income as a percentage of net sales increased to 2.6 percent in the first quarter of 2015, compared to 1.8 percent in the same quarter last year. Based on the company's current strategy and performance to date, the company expects to achieve net earning before taxes growth of approximately 23 percent compared to 18 percent in fiscal 2014. 519 BW 6/14/16 Countryman Designs Inc. Current Events/Issues 12/31/15 The company intends to remodel 25 stores during fiscal 2016 following the remodeled prototype developed last year. On March 18, 2016 the company entered into a credit facility agreement with the Business Development Bank of Canada, which amended its existing 150 million credit facility which was due to expire in October 2016. The agreement provides the Company with the option to increase the amount to $200 million, subject the lenders agreement. The new credit facility expires September 30, 2020 and may be used for working capital, letters of credit and other general purposes. Should certain liquidity and other requirements not be met, as defined in the agreement, no additional funds may be borrowed and outstanding balance becomes immediately payable. The agreement requires that the Company maintain a working capital balance of 125 million and quick ratio of .65. Additionaly, the Company is only allowed to repurchase common stock up to $100,000 in any fiscal year. Countryman Design Inc. Planning Materiality Assessment Year Ended: December 31, 2015 Primary Users of Financial Statements (list): Mateirality Bases (in thousands): Base Income before taxes Revenues Expenses Equity Total Assets Amount 103,900 1,305,600 1,202,400 289,700 604,400 Planning Materiality (in thousands) Explanation: Planning Materiality Levels Lower Limit Upper Limit % $ % $ 5 5,195 10 0.5 6,528 2 0.5 60,120 2 0.5 1448.50 5 0.5 3,202 2 10,390 26,112 24,048 14,485 12,808 Likelihood of Mangement Fraud (check one) Low likelihood Reasonably low likelihood Moderate Likelihood Performance Materiality (in thousands): Planning Materiality Multiplication Factor ( .75 if low likelihood of management fraud, 0.50 if reasonably low likelihood of management fraud, and 0.25 if moderate likelihood of management fraud). Performance Materiality (in thousands): Specific Accounts Requiring Lower Performance Materiality: Account Explanation: Account Explanation: Explanation: Account Explanation: Account Explanation: Account Explanation: Account Explanation: Explanation: 520 Prepared by: Date: Reviewed by: 10-Jul-17 Performance Materiality Performance Materiality Performance Materiality Performance Materiality Performance Materiality Performance Materiality Countryman Designs Inc. Planning Materiality Financial Informaton 12/31/15 All amounts are in thousands 12/31/15 Net sales Cost of Sales 12/31/14 $1,305,600 $1,243,788 596,700 573,727 Gross Margin 708,900 670,061 Selling, general and administrative expenses 604,600 585,225 Operating income Interset Income Interest expense 104,300 700 1,100 84,836 636 1,009 Income before taxes Provision for income taxes 103,900 41,400 84,463 33,686 Net income $62,500 $50,777 $124,200 13,900 148,600 4,500 17,900 38,000 $115,845 12,892 137,647 4,165 16,572 35,199 Total Current assets 347,100 322,320 Property plant and equipment Furture income tax 275,500 4,100 254,475 3,790 Assets Current Cash and cash equivalents Accounts receivable Inventory Income taxes receivable Future income tax Prepaid expenses Other assets 13,700 12,670 $640,400 $593,255 Accounts payable Accrued salaries and bonus Accrued rent Gift certificates Other accrued liabilities $62,800 27,800 23,800 30,600 60,200 $58,165 25,779 22,014 27,654 55,768 Total current liabilities 205,200 189,380 Deferred lease costs Future income taxes Long-term performance compensation Other liabilities 102,100 - 9,600 33,800 94,593 21 8,877 31,339 $350,700 $324,210 Common stock and paid in capital Retained earnings Accumulated other comprehensive loss Treasury stock 466,300 483,000 -1,800 -657,800 432,080 447,556 -1,652 -608,939 Total shareholders' equity 289,700 269,045 $640,400 $593,255 Total assets Liabilities Current liabilities Total liabilities Shareholders' equity Total liabilities and shareholders' equity Countryman Design Inc. Planning Materiality Assessment Year Ended: December 31, 2015 Primary Users of Financial Statements (list): The primary users of the financial statement are the current shareholders and potential shareholders of the company. Lenders to the company, employees of the company, government authority, other regulatory agencies, suppliers and customers are the primary users of financial statement. Mateirality Bases (in thousands): Base Income before taxes Revenues Expenses Equity Total Assets Amount 103,900 1,305,600 1,202,400 289,700 604,400 Planning Materiality Levels Lower Limit Upper Limit % $ % $ 5 5,195 10 0.5 6,528 2 0.5 60,120 2 0.5 1448.50 5 0.5 3,202 2 10,390 26,112 24,048 14,485 12,808 Planning Materiality (in thousands) $6,754 Explanation: It is a listed company and the main account that requires to be considered is the income before taxes as it will enable to determine the return on investment and the dividends paid to the shareholders. Thus, income before taxes is the chosen basis and those account with more than $10,390,000 would be considered material and those that are below than $5,200,000 would be considered immaterial. Thus, the estimated planning materiality is $6,754,000 it about 6.5% of the income before taxes. There would be slight lower to increasing the quantity and quality of gathered evidence. Setting lower materiality limitation will result in more items falling within the range. Similarly, from the previous analysis it is clear that there was no material misstatement found in the past audit and it indicates about the lower level of fraud chances. from the previous analysis it is clear that there was no material misstatement found in the past audit and it indicates about the lower level of fraud chances. Likelihood of Mangement Fraud (check one) Low likelihood Reasonably low likelihood Moderate Likelihood Performance Materiality (in thousands): Planning Materiality Multiplication Factor ( .75 if low likelihood of management fraud, 0.50 if reasonably low likelihood of management fraud, and 0.25 if moderate likelihood of management fraud). Performance Materiality (in thousands): Specific Accounts Requiring Lower Performance Materiality: Account Cash and cash equivalents Explanation: In case of cash and cash equivalent account there is a requirement for lower performance materiality. There should be reduction in the chances of materiality that includes undetected and uncorrected misstatement in the account as a whole. This account takes in to consideration various accounts to determine the material misstatement. Using lower level of performance materiality every transaction should be tested and disclosed. In this case, the amount set is $1,000,000 that would be appropirate to test for materiality. Account Accounts receivables Explanation: There was significant increase in the accounts receivables of the company. Various transactions are involved in changing the accounts receivables balance. Change in sales level and collection policies tend to have impact on the accounts receivable balance. In this casel lower performance materiality testing of all the transactions that are worth more than $0.6 million will be appropriate. Account Accounts payable Explanation: In this case, it is essential to monitor all the transactions that are involving credit. In this case, the transactions that are above the value of $0.6 million should be tested for materiality. Increase in the volume of business transaction will result in increasing the credit transaction. In this case, lower performance materiality testing would enable in measuring the performance materiality. Account Other accrued liabilities Explanation: There is increase in the other accrued liabilities for the company. There should be a lower performance materiality testing for the account. In this case, there should be testing and monitoring of all those transactions that are more than $500,000 so that it would be appropriate to evaluate the performance materiality. Account Explanation: Account Explanation: 520 Prepared by: Date: Reviewed by: reholders of the company. y agencies, suppliers and he income before taxes as ders. Thus, income before red material and those that materiality is $6,754,000 it ntity and quality of hin the range. Similarly, past audit and it indicates 10-Jul-17 $6,800 0.75 $5,100 Performance Materiality $1,000,000 performance materiality. rected misstatement in the he material misstatement. sed. In this case, the Performance Materiality $600,000 arious transactions are n policies tend to have ing of all the transactions Performance Materiality $600,000 edit. In this case, the ase in the volume of ormance materiality Performance Materiality $500,000 d be a lower performance ll those transactions that ality. Performance Materiality Performance Materiality Countryman Design Inc. Planning Materiality Assessment Year Ended: December 31, 2015 Primary Users of Financial Statements (list): The primary users of the financial statement are the current shareholders and potential shareholders of the company. Lenders to the company, employees of the company, government authority, other regulatory agencies, suppliers and customers are the primary users of financial statement. Mateirality Bases (in thousands): Base Income before taxes Revenues Expenses Equity Total Assets Amount 103,900 1,305,600 1,202,400 289,700 604,400 Planning Materiality Levels Lower Limit Upper Limit % $ % $ 5 5,195 10 0.5 6,528 2 0.5 60,120 2 0.5 1448.50 5 0.5 3,202 2 10,390 26,112 24,048 14,485 12,808 Planning Materiality (in thousands) $6,754 Explanation: It is a listed company and the main account that requires to be considered is the income before taxes as it will enable to determine the return on investment and the dividends paid to the shareholders. Thus, income before taxes is the chosen basis and those account with more than $10,390,000 would be considered material and those that are below than $5,200,000 would be considered immaterial. Thus, the estimated planning materiality is $6,754,000 it about 6.5% of the income before taxes. There would be slight lower to increasing the quantity and quality of gathered evidence. Setting lower materiality limitation will result in more items falling within the range. Similarly, from the previous analysis it is clear that there was no material misstatement found in the past audit and it indicates about the lower level of fraud chances. from the previous analysis it is clear that there was no material misstatement found in the past audit and it indicates about the lower level of fraud chances. Likelihood of Mangement Fraud (check one) Low likelihood Reasonably low likelihood Moderate Likelihood Performance Materiality (in thousands): Planning Materiality Multiplication Factor ( .75 if low likelihood of management fraud, 0.50 if reasonably low likelihood of management fraud, and 0.25 if moderate likelihood of management fraud). Performance Materiality (in thousands): Specific Accounts Requiring Lower Performance Materiality: Account Cash and cash equivalents Explanation: In case of cash and cash equivalent account there is a requirement for lower performance materiality. There should be reduction in the chances of materiality that includes undetected and uncorrected misstatement in the account as a whole. This account takes in to consideration various accounts to determine the material misstatement. Using lower level of performance materiality every transaction should be tested and disclosed. In this case, the amount set is $1,000,000 that would be appropirate to test for materiality. Account Accounts receivables Explanation: There was significant increase in the accounts receivables of the company. Various transactions are involved in changing the accounts receivables balance. Change in sales level and collection policies tend to have impact on the accounts receivable balance. In this casel lower performance materiality testing of all the transactions that are worth more than $0.6 million will be appropriate. Account Accounts payable Explanation: In this case, it is essential to monitor all the transactions that are involving credit. In this case, the transactions that are above the value of $0.6 million should be tested for materiality. Increase in the volume of business transaction will result in increasing the credit transaction. In this case, lower performance materiality testing would enable in measuring the performance materiality. Account Other accrued liabilities Explanation: There is increase in the other accrued liabilities for the company. There should be a lower performance materiality testing for the account. In this case, there should be testing and monitoring of all those transactions that are more than $500,000 so that it would be appropriate to evaluate the performance materiality. Account Explanation: Account Explanation: 520 Prepared by: Date: Reviewed by: reholders of the company. y agencies, suppliers and he income before taxes as ders. Thus, income before red material and those that materiality is $6,754,000 it ntity and quality of hin the range. Similarly, past audit and it indicates 10-Jul-17 $6,800 0.75 $5,100 Performance Materiality $1,000,000 performance materiality. rected misstatement in the he material misstatement. sed. In this case, the Performance Materiality $600,000 arious transactions are n policies tend to have ing of all the transactions Performance Materiality $600,000 edit. In this case, the ase in the volume of ormance materiality Performance Materiality $500,000 d be a lower performance ll those transactions that ality. Performance Materiality Performance Materiality Countryman Design Inc. Planning Materiality Assessment Year Ended: December 31, 2015 Primary Users of Financial Statements (list): The primary users of the financial statement are the current shareholders and potential shareholders of the company. Lenders to the company, employees of the company, government authority, other regulatory agencies, suppliers and customers are the primary users of financial statement. Mateirality Bases (in thousands): Base Income before taxes Revenues Expenses Equity Total Assets Amount 103,900 1,305,600 1,202,400 289,700 604,400 Planning Materiality Levels Lower Limit Upper Limit % $ % $ 5 5,195 10 0.5 6,528 2 0.5 60,120 2 0.5 1448.50 5 0.5 3,202 2 10,390 26,112 24,048 14,485 12,808 Planning Materiality (in thousands) $6,754 Explanation: It is a listed company and the main account that requires to be considered is the income before taxes as it will enable to determine the return on investment and the dividends paid to the shareholders. Thus, income before taxes is the chosen basis and those account with more than $10,390,000 would be considered material and those that are below than $5,200,000 would be considered immaterial. Thus, the estimated planning materiality is $6,754,000 it about 6.5% of the income before taxes. There would be slight lower to increasing the quantity and quality of gathered evidence. Setting lower materiality limitation will result in more items falling within the range. Similarly, from the previous analysis it is clear that there was no material misstatement found in the past audit and it indicates about the lower level of fraud chances. from the previous analysis it is clear that there was no material misstatement found in the past audit and it indicates about the lower level of fraud chances. Likelihood of Mangement Fraud (check one) Low likelihood Reasonably low likelihood Moderate Likelihood Performance Materiality (in thousands): Planning Materiality Multiplication Factor ( .75 if low likelihood of management fraud, 0.50 if reasonably low likelihood of management fraud, and 0.25 if moderate likelihood of management fraud). Performance Materiality (in thousands): Specific Accounts Requiring Lower Performance Materiality: Account Cash and cash equivalents Explanation: In case of cash and cash equivalent account there is a requirement for lower performance materiality. There should be reduction in the chances of materiality that includes undetected and uncorrected misstatement in the account as a whole. This account takes in to consideration various accounts to determine the material misstatement. Using lower level of performance materiality every transaction should be tested and disclosed. In this case, the amount set is $1,000,000 that would be appropirate to test for materiality. Account Accounts receivables Explanation: There was significant increase in the accounts receivables of the company. Various transactions are involved in changing the accounts receivables balance. Change in sales level and collection policies tend to have impact on the accounts receivable balance. In this casel lower performance materiality testing of all the transactions that are worth more than $0.6 million will be appropriate. Account Accounts payable Explanation: In this case, it is essential to monitor all the transactions that are involving credit. In this case, the transactions that are above the value of $0.6 million should be tested for materiality. Increase in the volume of business transaction will result in increasing the credit transaction. In this case, lower performance materiality testing would enable in measuring the performance materiality. Account Other accrued liabilities Explanation: There is increase in the other accrued liabilities for the company. There should be a lower performance materiality testing for the account. In this case, there should be testing and monitoring of all those transactions that are more than $500,000 so that it would be appropriate to evaluate the performance materiality. Account Explanation: Account Explanation: 520 Prepared by: Date: Reviewed by: reholders of the company. y agencies, suppliers and he income before taxes as ders. Thus, income before red material and those that materiality is $6,754,000 it ntity and quality of hin the range. Similarly, past audit and it indicates 10-Jul-17 $6,800 0.75 $5,100 Performance Materiality $1,000,000 performance materiality. rected misstatement in the he material misstatement. sed. In this case, the Performance Materiality $600,000 arious transactions are n policies tend to have ing of all the transactions Performance Materiality $600,000 edit. In this case, the ase in the volume of ormance materiality Performance Materiality $500,000 d be a lower performance ll those transactions that ality. Performance Materiality Performance Materiality