You had a meeting with Tyler and Matthew, and you documented the following

Tyler: Good morning I hope you are doing well. To get started we want you perform our audit this year. We know it is the first time being audited but we hope you will take it on!

You: For sure we will do that.

Matthew: Thats great! We are happy to hear that you will take it on.

You: Since we will be doing the audit is it ok if I ask you guys a few questions to get me started on preparing the risks.

Tyler: Yes, that would be great to get that out of the way.

You: How do your employees document their time?

Matthew: Oh, we trust our employees, so they fill out a time sheet and hand it in every two weeks to be processed by payroll.

You: Thanks! What about IT security

Tyler: Well since we are an IT company, we hope we do well at that. All computers are password protected with each employee having their own password. Backups on accounting records are done daily on and off site.

You: Ok thats great! What are your inventory procedures?

Matthew: All parts are locked up. But we have never counted inventory and just estimate it every year.

You: Well I think that is everything for now. Thank you.

Tyler: One last thing. Here is a copy of our summary numbers from last year (Exhibit III). We are right now most concerned with revenues.

After the conversation your partner has asked you to prepare the overall financial statement level risk and calculate materiality.

Net Income: $900,000

Revenues $4.56M

Expenses $3.66M