The audit firm dictates that one planning materiality amount (and percentage if necessary) is to be used for the financial statement as a whole. The planning materiality bases are as follows:

Base	Threshold (%)
Profit before tax	5-10
Turnover	0.5-1
Gross profit	2.0-5
Total assets	0.5-1

Based on the information given and your risk assessment below,

• select the base for planning materiality that you believe is most appropriate, and provide three reasons justifying the base you have chosen.
• calculate and suggest the planning materiality (amount and percentage) that you would use for the client.

Financial Information:

	Estimated	Actual	Actual
Account	30-Jun	30-Jun	30-Jun
	2021	2020	2019
Sales Revenue	157,309,796	143,008,906	135,425,100
Product returns	-7,078,941	-2,574,160	- 2,708,502
FX Gain/Loss	805,041	-11,230	120,301
Other Revenue	4,460,400	1,001,062	712,356
Total revenue	155,496,296	141,424,578	133,549,255
COS	83,374,192	81,515,076	78,546,558
Salaries expenses	28,315,763	21,451,336	20,313,765
Administration expenses	11,011,686	10,010,623	8,125,506
Selling expenses	7,865,490	5,720,356	5,417,004
Borrowing Costs	3,845,700	3,311,423	2,945,001
Total expenses	134,412,831	122,008,815	115,347,834
Profit before income tax	21,083,466	19,415,763	18,201,421
Income Tax expense	5,270,866	5,048,098	4,550,355
Profit after income tax	15,812,599	14,367,665	13,651,066
Current assets
Cash	10,650,120	12,061,680	10,575,150
Accounts Receivable	21,845,000	20,580,400	18,757,824
Inventory	16,102,457	13,254,785	12,540,125
Total current assets	48,597,577	45,896,865	41,873,099
Non-current assets
Property, plant and equipment	25,140,124	19,250,123	18,600,825
Intangible assets	9,845,145	7,420,154	7,543,500
Total non-current assets	34,985,269	26,670,277	26,144,325
Total assets	83,582,846	72,567,142	68,017,424
Current Liabilities
Accounts Payable	22,564,012	20,156,000	19,875,050
Interest Bearing Liabilities	7,500,000	6,500,000	8,500,000
Total current liabilities	30,064,012	26,656,000	28,375,050
Non-current liabilities
Deferred tax liabilities	1,400,451	2,650,041	2,580,147
Interest-bearing liabilities	22,000,000	18,000,000	16,500,000
Total non-current liabilities	23,400,451	20,650,041	19,080,147
Total liabilities	53,464,463	47,306,041	47,455,197
Equity	30,118,383	25,261,101	20,562,227

Risk Assessment:

Three High Inherent Risks:

Potential Risk - Description	Accounts	Assertions
Business Type - Coming from the US and France, there are new entries going into the market offering high-tech shoes at cheaper price. Therefore, if Sportastic cannot handle with new entrants from the US and France, it is an inherent risk because there will be an increase in the products being returned on account of technical problems in addition to getting negative feedback from purchasers.	Revenue	Accuracy and Occurrence
Transaction Among Related Parties - This is because of the exchange rates between AUD and USD. Sportastic pays its suppliers from China in USD that have problems with its poor-quality control. Because of this, some shipments have to be returned for repair. Exchange rates is very sensitive in fluctuation due to market uncertainties especially when there is a current dispute between China and Australia. Having to exchange rate between AUD and USD just to pay its suppliers is an inherent risk that can cause its transactions to be overstated in light of the fluctuation of the exchange rates due to market inequalities.	Cash and Bank	Accuracy and Valuation
Complexity Level - Sportastic launched a new product in August 2020 in order to stay competitive in the industry which resulted in a significant marketing cost just to promote its new model following the occurring advertising campaign. This is a risk as the company now has skyrocketed expense in promotion activities in addition to their assumption of recording their transactions activities in advertising and promotions as that their business driving high complexity work to execute and complete will generate the probability of completing them incorrectly which will only add on the inherent risk.	Expenses	Accuracy and Occurrence

Three High Internal Control Weaknesses:

Control Weakness	Accounts	Assertions	Transaction Level Internal Control
Lack of Internal Control Assessment - Majority of the staff at Sportastic are young and inexperience as they are employed on casual basis, not permanent. This is an obvious sign of the lack of internal control. Having high turnover of employees in addition to having young and inexperience employees like these, they will increase the chances of making errors and mistakes when processing orders or returns which resulted in having high record of products returned.	Revenue	Accuracy and Occurrence	Sportastic should implement management policies and procedure in order to have constant review of its internal control risks assessments such as segregation of duties and reviewing of activities in the company.
Lack of Proper Policies and Procedures - Lacking in the risk mentioned, issues haven been reported in relation to the process of products returns by customers which resulted in high record of products returns. This shows the lack of strict policies in controlling the sales process that will guarantee the quality of the products as ordered by the purchasers.	Inventory	Existence and Valuation	By implementing more stricter policies and procedures, there will be better internal control as proposed by the management such as having an internal audit department.
Lack of Transactions and Activity Reviews - With the issues reported due to the high record of returns, this shows a direct lack of transaction and activity review process which certify the quality of the products delivered to the buyers are in good condition and that the product delivered are what the buyers ordered.	Trade Receivables and Trade Payables	Valuation	With the implementation of better policies and procedures, this will generate transactions and review activities such as management re view and bank reconciliation.