Question three 110 Marks! KGL&C Associates is currently conducting an audit of Cozumel Enterprise Limited. While conducting the audit the auditors observed the following: Audit Sections Explanations Equipment Several pieces of equipment were badly damages and deemed impaired Trade Receivables Balance of $775 million deemed uncollectible at the year end. Revenues Seemed stable and fluctuated no more than 2% over the last 10 years Inventory 50% of the company's inventory deemed ahsolete at the year end. Shareholders' equity The entity has accumulated significant losses over the years. On further analysis it was ascertained that trade receivables is 20% of the entity's total assets. In the determination of materiality, the auditor highlighted the following bases and percentage materiality relevant to the said bases. Bases Percentage materiality Total assets 10% Non-Current Assets 20% Current Assets 25% Total Revenues 5% Net Income 12.5% Shareholder's Equity 7.5% The entity reported the following to the auditors from its preliminary trial balance before the audit Bases Balances Total assets $3.88 billion Non-Current Assets $ 1.58 billion Current Assets $1.30 billion Total Revenues S10 billion Net Income (S450) million Shareholder's Equity (Accumulated Deficit) $1.25 billion Required: a. Define the term preliminary judgement of materiality and highlight its importance to the planning process 12 marks b. Using the relevant information above, calculate materiality and briefly discuss how this was determined. 15 marks c. Differentiate between audit risk and audit failure. [3 mark