RRI's financial statements are provided to:

• The preferred shareholders who receive annual dividend payments: Dividends are paid when net income exceeds $100,000 and are calculated as: 50% × (net income - $100,000). The maximum salary for Sam and his wife, Lucky (who is RRI's office administrator), that can be expensed in the calculation of net income is $80,000 each.
• The bank, with whom RRI has an operating line of credit: RRI has never drawn down the maximum on the line of credit, and RRI has a strong credit history with the bank.

RRI's 2020 draft financial statements reported the following balances:

Total customer revenues                               450,000

Government grant revenue (1)                         25,000

Payment of environmental penalty (2)              5,000

 Salary of Sam and Lucky (3)                        200,000
Net income before tax                                    135,000
Total assets                                                   1,200,000

 

Note 1: Non-renewable government grant to subsidize hiring of a student.

Note 2: Payment for disposal of waste that was found to contain asbestos. RRI attempts to avoid this, but on some sites asbestos cannot be properly segregated, and unexpected penalties occur.

Note 3: Regular salary of $160,000 plus discretionary bonus of $40,000. 

 

Perform a preliminary assessment of materiality for the 2020 audit.