Stephanie Starr is an audit senior at Black & Pink LLP (Black & Pink). Stephanie was

assigned to prepare the materiality analysis for K-Town Music Company Inc. (K-Town).

K-Town has a December 31 year-end. The draft income statement for K-Town is as

follows:

K-Town Music Company

Draft income statement

For the year ended December 31, 2020

Revenue $1,620,429

Cost of sales 902,450

Gross profit 717,979

Advertising 85,200

General administrative (note 1) 146,000

Salaries 306,000

Income before tax 180,779

Income tax expense 45,195

Net income $ 135,584

Note 1: General administrative consists of office supplies and rent expense from the office

K-Town is a privately-owned company with one shareholder. The shareholder is NOT

actively involved in the business and uses K-Town as a source of income. In 2020,

K-Town obtained a bank loan to finance the expansion of its business.

Required:

a) Determine the users of the financial statement and their objectives. (2 marks)

b) Determine an appropriate basis for the calculation of materiality. (2 marks)

c) Determine a range for materiality at the overall financial statement level. (2 marks)