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 Balance Sheet Preliminary Audited Dec. 31. 2020 Dec. 31. 2019 Cash 9 243 689 $ 133 981 Trade accounts receivable 3544 009 2 224 921 Allowance for uncollectible accounts (120 000] (215 000] Inventories 4520 902 3 888 400 Prepaid expenses 29 500 24 T00 Total current assets 8 218 100 6 05? 002 Property. plant. and equipment: At cost 12 945 255 9 922 534 Less accumulated depreciation (4 382 990] {3 W5 911] Total prop., plant' and equipment 8 562 265 6 146 623 Goodwill 1 200 000 345 000 Total assets 81'! 980 365 S 12 54-8 625 Accounts payable $ 2 141 552 $ 2 526 T89 Bank loan payable 150 000 Accrued liabilities 723 600 598 020 Federal income taxes payable 1 200 000 1 759 000 Current portion of longterm debt 240 000 240 000 Total current liabilities 4 455 152 5 123 809 Longten'n debt 960 000 1 200 000 Shoulders' equity: Common shares 1 250 000 1 000 000 Additional paidin capital 2 469 921 1 333 801 Retained earnings 8 845 292 3 891 015 Total shareholders\" equity 12 565 213 6 224 816 Total liabilities and shareholders' equity $1? 980 365 $12 548 625 Combined statement of Income and Retained Earnings Preliminary Audited Dec. 31. 2020 Dec. 31. 2019 Sales 5543 994 931 $32 258 015 Cost of goods sold 24 19? 212 19 032 229 Gross prot 19 79? T19 13 225 T86 Selling. generalt and administrative expenses 10 592 221 8 900 432 Pension cost 1 11? 845 865 030 Interest expense 83 3T6 104 220 Total operating expenses 11 793 442 9 869 682 Income before taxes 8 004 27? 3 356 104 Income tax expense 1 800 000 1 141 000 Net income 6 204 2?? 2 215 104 Beginning retained earnings 3 891 015 2 675 9-11 10 095 292 4 891 015 Dividends declared (1 250 000] {1 000 000] Ending retained earnings 5 8 845 292 5 3 891 015