Suppose that you are the auditor of a major retail client who has reported the following income before taxes (IBT) for the first two quarters of the year: 1st quarter = $1,200,000 and 2nd quarter = $1,500,000. You are in the process of establishing overall materiality for the client. Based on prior years, the client has a 10% decline in IBT from the 2nd quarter to the 3rd quarter. You also know that IBT in the 4th quarter increases by 25% over the 3rd quarter.

You need to calculate the annual IBT using the trends in third and fourth quarters, and then apply 5% of IBT as benchmark for overall materiality.

Required:

Determine the amount of overall materiality for the audit based on these preliminary amounts. (Round your answer to the nearest thousand value.)

Amount of overall materiality