One of the underlying principles in auditing is the concept of materiality. An auditor designs procedures in order to identify and correct errors or irregularities that would have a material impact on the financial statements. Such errors or irregularities are considered material if they would impact the decision-making of the users of the financial statements. Materiality is used in determining audit procedures, selecting samples, and evaluating differences from client records to audit results. It is the maximum amount of misstatement, individually or in aggregate, that can be accepted in the financial statements. In selecting the base figure to be used to calculate materiality, an auditor should consider the key driver of the business. They should ask themselves, What are the end users (such as shareholders and banks) of the financial statements going to be looking at? For example, will shareholders be interested in the net income that can be used to pay dividends and increase share price? Planning materiality W&S Partners audit methodology dictates that one planning materiality (PM) amount is to be used for the financial statements as a whole. Further, only one basis should be selecteda blended approach or average should not be used. The basis selected is the one determined to be the key driver of the business. W&S Partners uses the following percentages as starting points for the various bases. These starting points can be increased or decreased by taking into account qualitative client factors, which could be: the nature of the clients business and industry (such as rapid change, either through growth or downsizing, or unstable environment) the fact that it is a publicly listed entity (or subsidiary of one) subject to regulations the knowledge of or high risk of fraud.

Base Threshold (%) Profit before tax 5.0 Revenues 1.0 Total assets 1.0 Equity 3.0

Typically, profit before tax is used; however, it cannot be used if the entity is reporting a loss for the year or if profitability is not consistent. 10 Alpine Bags Ltd. An Audit Case Study Assignment2 09/06/2021 8:43:18

When calculating PM based on interim figures, it may be necessary to annualize the results. This allows the auditor to properly plan the audit based on an approximate projected year-end balance. Then, at year end, the figure is adjusted, if necessary, to reflect the actual results. Note: Adjustments to the starting points are made by an experienced auditor using their professional judgement. The aim is to set PM at a high enough level that appropriately balances the amount of testing, while still keeping the audit risk to an acceptable level. Performance materiality W&S Partners also dictates that performance materiality be determined for each audit engagement

. Performance materiality is an amount less than planning materiality that reduces the likelihood that any uncorrected and undetected misstatements within a class of transactions, account balances, or disclosures in aggregate exceed overall planning materiality. W&S Partners policy is to use 70 percent of planning materiality to determine performance materiality.

Required

Using the working paper provided (A21): Select the basis for planning materiality that you believe is most appropriate. Justify your selection. Calculate the planning materiality (PM) using the December 31, 2023, trial balance and draft Statement of Income in Appendix 2. Based on your determination of PM, calculate and conclude on performance materiality.