W&S Partners has just won the January 31, 2023, audit for Cloud 9. The audit team assigned to this client is: W&S Partners use the following percentages as starting points for the various benchmarks: Benchmark Threshold (%) 5.0 0.5 Partner, Jo Wadley Audit manager, Sharon Gallagher Audit senior, Josh Thomas IT audit manager, Mark Batten Experienced staff, Suzie Pickering First-year staff, lan Harper Income before tax Total revenue Gross profit Total assets 2.0 0.5 Equity 1.0 These starting points can be increased or decreased by taking into account qualitative client factors, which could be: As a part of the risk assessment phase for the new audit, the audit team needs to gain an understanding of Cloud 9's structure The nature of the client's business and industry (for example, rapidly changing, either through growth or downsizing, or an unstable environment). and its business environment, determine materiality, and assess Whether the client is a public company (or subsidiary of) subject to regulations. the risk of material misstatement. This will assist the team in de- veloping an audit strategy and designing the nature, extent, and timing of audit procedures. One task during the planning phase is to consider the con- cept of materiality as it applies to the client. Auditors will de- sign procedures to identify and correct errors or irregularities that would have a material effect on the financial statements essary to annualize the results. This allows the auditors to plan and affect the decision-making of the users of the financial the audit properly based on an approximate projected year-end statements. Materiality is used in determining audit procedures balance. Then, at year-end, the figure is adjusted, if necessary, to and sample selections, and evaluating differences from client records to audit results. Materiality is the maximum amount of misstatement, individually or in aggregate, that can be accepted in the financial statements. In selecting the benchmark to be Answer the following questions based on the information pre- used to calculate materiality, the auditors should consider the key drivers of the business. They should ask, "What are the end users (that is, stockholders, banks, etc.) of the accounts going to be looking at?" For example, will stockholders be interested in profit figures that can be used to pay dividends and increase share price? w&S Partners' audit methodology dictates that one plan- ning materiality (PM) amount is to be used for the financial statements as a whole. The benchmark selected for determin- The knowledge of or high risk of fraud. Typically, income before tax is used; however, it cannot be used if reporting a loss for the year or if profitability is not consistent. When calculating PM based on interim figures, it may be nec- reflect the actual results. Required sented for Cloud 9 in the appendix to this text and in the current chapter and previous chapters. a. Using the October 31, 2022, trial balance (in the appendix to this text), calculate planning materiality and include the justification for the benchmark that you have used for your calculation. b. Biscuss how the planning materiality would be used eo deter- mine performance materiality. c. . The nning materiality amount iscquently incrsed or decreased later in the a owwauld thnt mpact the andit ing materiality is the one determined to be the key driver of the business. A B Cloud 9, Inc. Trial Balance 31-Oct-22 31-Oct-21 Debit Credit Debit Credit 5 Cash and cash equivalents 6 Accounts receivable 7 Allowance for doubtful accounts $ 13,446,154 $ 6,123,884 70,485,625 64,867,910 2$ 704,856 648,679 8 Inventory 55,100,000 57,900,000 9 Investments (derivatives) 10 Deferred income taxes (current) 11 Prepaid expenses and other current assets 12 Property, plant, and equipment 13,419,231 13,805,769 2,857,692 3,584,615 9,265,385 6,446,154 103,803,846 97,576,923 13 Accumulated depreciation 14 Identifiable intangible assets and goodwill 15 Accumulated amortization 16 Deferred income taxes and other assets (noncurrent) 17 Current portion of long-term debt 18 Notes payable 19 Accounts payable 20 Accrued liabilities 21 Income taxes payable 22 Long-term debt 39,761,538 35,207,692 3,723,007 3,851,923 9,557,692 8,410,849 2,115,385 300,125 21,376,923 34,823,077 14,986,457 22,561,538 25,803,846 24,150,000 2,211,539 3,726,923 23,661,538 17,119,106 23 Deferred income taxes and other liabilities (noncurrent) 4,915,384 4,330,769 24 Common stock at par value 111,538 107,692 25 Capital stock in excess of par value 26 Unearned stock compensation 19,415,385 16,484,615 253,846 480,769 27 Accumulated other comprehensive income 28 Beginning retained earnings 29 Dividends 5,011,538 4,746,154 122,857,692 98,150,473 3,866,838 3,299,423 30 Repurchases of common stock 31 Revenue 4,627,381 2,939,393 277,338,461 269,442,308 32 Cost of sales 169,346,154 163,003,846 33 Selling and administrative 34 Interest expense 79,092,308 78,246,154 1,438,461 1,773,077 35 Other expense 453,846 757,692 36 Income tax expense 9,511,538 9,238,462 $ 555,260,542 $555,260,542 $ 527,052,997 $ 527,052,997 37 38 %24