The Reinke Bread Company (RBC) is a major retailer of specialty sandwich items and baked goods. The following information represents the companys financial position as of December 31, 2017, and December 31, 2016.

(unaudited) (audited)

December 31, 2017 December 31, 2016

Total assets $698,752,000 $542,609,000

Accounts receivable 25,152,000 19,041,000

Total sales 1,066,691,000 828,971,000

Cost of goods sold 842,255,000 628,534,000

Net income 57,456,000 58,849,000

Earnings per share $1.81 $1.88

RBCs auditor assesses RBC as a high audit risk. The auditor has detected an overstatement of accounts receivable of $345,000. The misstatement is not a surprise to the auditors, as they have detected misstatements in this account in the past.

On a per share basis, the misstatement represents $0.01 of earnings per share. The auditor believes that the misstatement should be corrected. Management argues strongly that they prefer not to make the correction because they do not believe it is material; that is, the misstatement represents just over 1% of the account balance. Although left unsaid, the auditor knows that management is under considerable pressure from Wall Street to meet analyst expectations for earnings per share. Reducing earnings per share by even $0.01 would cause the trend in earnings to become even more negative than the unaudited financial numbers already reveal, and it would cause the company to just miss analyst forecasts for earnings per share.

a) Use three common benchmarks for making materiality judgments (net income, total assets, and net sales) to estimate materiality for the financial statements overall. Please use 10% as the tolerable error threshold.

b) What difficulties does the auditor face when the alternative benchmarks yield differing conclusions about materiality?

c) What qualitative factors should the auditor consider in making the materiality judgment for BBC?

d) Explain a reason for choosing one particular benchmark among the three calculated in part (a) as the best answer for this companys audit?