You, CPA, as the Senior Auditor for the MMC financial statement audit engagement for the year ended March 31, 2020 met with the Audit Partner prior to beginning audit fieldwork. The Audit Partner has asked you to draft a memo regarding materiality for the March 31, 2020 year-end audit. Specifically, the Audit Partner is interested to know who the primary users are for the financial statements, the overall materiality and performance materiality for the audit. She has requested you incorporate both quantitative and qualitative analysis supporting your assessment of materiality levels

In addition to the background information obtained for Question #1 (Part A), you obtained the following information to help prepare the memo:

Background Information:

MMC is a profit-oriented company and follows International Reporting Standards (IFRS). MMC is a privately owned business, however there is a possibility that the company may go public in the future. During the fiscal year, MMC obtained a new bank loan. MMC obtained a bank loan of $5,000,000 to help with their international expansion and to fund a new marketing campaign. The bank is concerned with the profitability of MMC and is eager to see the audited financial statements due to the new loan granted during the year. The owners of MMC, Mike and Emily, were in discussions with a competitor 3 years ago about the potential of selling the business. Mike and Emily decided not to sell at that time, however they have thought about selling sometime in the near future if the day-to-day demands of running the business become too much to handle. Based on your knowledge of the industry, businesses of this nature are typically valued based on annual profitability. MMC Director of Finance has provided you with extracts from the draft financial statements (unaudited) for the year ended March 31, 2020.

APPENDIX: EXTRACTS FROM FINANCIAL STATEMENTS:

Extract from Income Statement:

Revenue $3,000,000

Cost of Goods Sold (2,200,000)

Gross Profit 800,000

Selling, General and Admin Expense (500,000)

Operating Income 300,000

Interest Expense (50,000)

Earnings from Continuing Operations Before Income Taxes 250,000

REQUIRED:

As noted above, you CPA, have been requested by the Audit Partner to prepare specific information pertaining to materiality for the March 31, 2020 financial statement audit engagement. Provide a response to the following requests:

1) Identify 2 primary users of the financial statements. For each user identified, explain the reason why this is a relevant user and their concerns.

Users: Description:

User #1 - X

User #2 - X

2) Identify the appropriate benchmark to calculate overall materiality for the March 31, 2020 financial statement audit. In your response, explain why the selected benchmark is appropriate and how it relates to the users of the financial statements.

Benchmark: Rationale:

3) Calculate Overall Planning Materiality. Provide both quantitate and qualitative analysis supporting your assessment of the materiality level.

Quantitative Analysis: Calculation Qualitative Analysis: Explanation

4) Calculate Performance Materiality. Provide both quantitate and qualitative analysis supporting your assessment of the materiality level.

Quantitative Analysis: Calculation Qualitative Analysis: Explanation