Planning Materiality

CurtainsMaster is a large proprietary company established in North Queensland in the 1990s, selling a wide range of high-quality fabric curtains for household decoration. The company purchases products from manufactures in Vietnam, Bangladesh, and China, and then sells its products to wholesales customers in Australia, Germany, and the United States. The company also places its products on consignment in various small retail stores in Queensland. Sales mainly peak from the second half of the financial year, generating an average of 60% of revenue for the whole year. In past years the company has performed well, with its profit rate at around 12% and an average increase in annual revenues of 5%.

However, since the middle of February the companys sales at small retail stores have decreased dramatically, by approximately 70%. From the middle of March, 60% of staff (both casual and full-time) were made redundant. For the last three months of the current financial year, the company is expecting to have no sales but still pay another 10% of the current total expenses. To minimise the impact of a tight cashflow, in February, when the financial market was peak, the company sold all its financial investments and generated some extra cash for the business before the market dived in March. However, things can get worse; there is much uncertainty and no clear indication of when the pandemic will end.

The audit firm dictates that one planning materiality amount is to be used for the financial statement as a whole. The planning materiality bases are as follows:

Base	Threshold (%)
Profit before tax	5-10
Turnover	0.5-1
Gross profit	2.0-5
Total assets	0.5-1

Based on the information given and your risk assessment,

• select the base for planning materiality that you believe is most appropriate, and provide three reasons justifying the base you have chosen,
• calculate the planning materiality.