Question 6 (10 marks)

WWW LLP (WWW) is the auditor of Actron Ltd. (Actron). Actron is a publicly held company, traded on the Toronto Stock Exchange with a year end of December 31. WWWs shares are widely held.

Actron is an automobile parts manufacturer servicing automobile plants in

North America. Its head office is located in London, Ontario. It also has two subsidiaries, located in the United States and Mexico. The subsidiary located in the United States is considered material to Actrons consolidated financial statements, representing approximately 60% of the consolidated revenues and total assets. The subsidiary located in Mexico is considered insignificant to the overall consolidated financial statements.

Excerpts from the unaudited consolidated financial statements for the year ended December 31, 2021, were as follows:

• Before-tax profits were $6,000 after restructuring costs of $90,000.
• Revenue was $1,200,000.
• Equity was $400,000.
• Total assets were $1,500,000.
• Competition is intense amongst the four major competitors in this industry. The economic downturn continues to reduce margins as companies struggle to maintain market share, and Actron has reported very small operating margins for each of the past three years. Management has restructured operations throughout

North America but will require debt financing to continue operations in the short term. Analysts have recently downgraded Actrons stock to a negative recommendation (that is, a do NOT buy).

• Regulatory authorities in the United States have been in contact with Actrons management to discuss possible misstatements in the recent quarterly financial statement filed by the United States subsidiary.
• Uncorrected balances in prior-year opening equity totalled $1,000. Based on the current years audit, misstatements will likely total $500. An audit senior has been assigned to thoroughly review the restructuring costs, as these costs may be misstated by another $750 above the expected current years misstatements.

Required:

1. Calculate and recommend overall materiality for the consolidated financial statements of Actron for the year ended December 31, 2021. Be sure to discuss the following:
   1. Users and their objectives (2 marks)
   2. Three potential appropriate bases and their percentages (3 marks)
   3. Qualitative considerations (2 marks)
   4. Overall recommendation (1 mark)
2. Calculate and recommend a performance materiality for the consolidated financial statements of Actron for the year ended December 31, 2021. Ignore any tax effects. (2 marks)