Pamela Albright is the manager of the audit of Stanton Enterprises, a public company that manufactures formed steel subassemblies for other manufacturers. Albright is planning the 2018 audit and is considering an appropriate amount for planning materiality, what tolerable misstatements should be allocated to the financial statement accounts, and the appropriate inherent risks. Summary financial statement information is shown in Figure 7-7. Additional relevant planning information is summarized next.

1. Stanton has been a client for 4 years, and Albright's firm has always had a good relationship with the company. Management and the accounting people have always been cooperative, honest, and positive about the audit and financial reporting. No material misstatements were found in the prior year's audit. Albright's firm has monitored the relationship carefully, because when the audit was obtained, LeonardStanton, the CEO, had the reputation of being a "high-flyer" and had been through bankruptcy at an earlier time in his career.

2. Stanton runs the company in an autocratic way, primarily because of a somewhat controlling personality. He believes that it is his job to make all the tough decisions. He delegates responsibility to others but is not always willing to delegate a commensurate amount of authority.

3. The industry in which Stanton participates has been in a favorable cycle the past few years and that trend is continuing in the current year. Industry profits are reasonably favorable, and there are no competitive or other apparent threats on the horizon.

4. Internal controls for Stanton are evaluated as reasonably effective for all cycles but not unusually strong. Although Stanton supports the idea of control, Albright has been disappointed that management has continually rejected Albright's recommendation to improve its internal audit function.

5. Stanton has a contract with its employees that if earnings before taxes, interest expense, and pension cost exceed $7.8 million for the year, an additional contribution must be made to the pension fund equal to 5% of the excess.

a. You are to play the role of Pamela Albright in the 12-31-18 audit of Stanton Enterprises. Make a preliminary judgment of materiality and determine performance materiality

b. Perform analytical procedures for Stanton Enterprises that will help you identify accounts that may require additional evidence in the current year's audit. Document the analytical procedures you perform and your conclusions. (Instructor option: Use an electronic spreadsheet to calculate analytical procedures.)

Stanton Enterprises Summary Financial Statements Combined Statement of Income and Retained Earnings Stanton Enterprises Summary Financial Statements Combined Statement of Income and Retained Earnings