Your firm, ACTG 307 & Associates, is engaged to audit the financial statements of XYZ Corporation. It is a private manufacturing company that is considering going public in three to four years. Your firm has been preforming audit services to this client for the past five years. The client requires financial statements audits for monitoring purposes, but mainly to receive finance and loans from banks. The management team has high level of competence and integrity, and based on the other teams assessment of internal control, the control risk is low.
Another team did most of the audit tests and completed most of the audit work papers (WP). Your team is assigned to complete the work papers and audit tests of the engagement. Specifically, your team is required to do the following:
- Assess the preliminary materiality based on the policy provided (WP 1-13), and complete WP 3-5, assuming moderate risk and satisfactory results of the analytical procedures.
WP 3-5
XYZ Corp.
Preliminary materiality Judgment
| Measurement base (e.g., income, revenue, assets) | Percentage Applied | Preliminary materiality |
| $ (put the name of the base here) | % | $ (rounded) |
WP 1-13 ACTG 307 & ASSOCIATES, CPAs POLICY STATEMENT Professional judgment is to be used at all times in setting and applying materiality guidelines. As a general guideline, the following policies are to be applied: 1. The combined total of misstatements in the financial statements exceeding 10 percent is normally considered material, less than 5 percent is presumed to be immaterial in the absence of qualitative factors. Between 5 percent and 10 percent require the greatest amount of professional judgment to determine their materiality. 2. The 5 percent to 10 percent must be measured in relation to the appropriate base. Many times there is more than one base to which misstatements should be compared. The following guides are recommended in selecting the appropriate base: a. Income statement. Combined misstatements in the income statement should ordinarily be measured at 5 percent to 10 percent of operating income before taxes. A guideline of 5 percent to 10 percent may be inappropriate in a year in which income is unusually large or small. b. Balance sheet. Combined misstatements in the balance sheet should originally be evaluated for current assets, current liabilities, and total assets. For current assets and current liabilities, the guidelines should be between 5 percent and 10 percent. For total assets, the guidelines should be between 3 percent and 6 percent. 3. Qualitative factors should be carefully evaluated on all audits. XYZ Corporations ANNUAL INCOME STATEMENT ($ Thou: EXCEPT PER SHARE) 12/31/20 12/31/19 12/31/18 21/31/2017 Sales Cost of Goods Sold 152356 123800 155929 131657 155427 130909 152256 132229 28556 24272 24518 20027 Gross Profit Selling, General & Administrative Expense 11530 11756 11910 13593 17026 12516 12608 6434 Operating Income Before Deprec. Depreciation, Depletion & Amortization 7219 6238 5908 5888 546 Operating Profit Interest Expense Non-Operating Income/Expense Special Items 9807 2160 2914 6278 1899 2987 -3120 6700 1130 2297 -409 889 2958 -31310 -2843 Pretax Income Total Income Taxes 7718 -1897 4246 228 7458 2127 -28695 -34831 Income Before Extraordinary Items and Noncontrolling Interests Noncontrolling Interest - Inc Acc 9615 -72 4018 69 5331 -15 6136 -52 Income Before Extraordinary Items & Discontinued Operations Preferred Dividends 3949 9687 0 5346 1576 6188 859 1145 9687 2804 3770 5329 Available for Common Savings Due to Common Stock Equivalents 0 0 0 -470 4859 Adjusted Available for Common Extraordinary Items Discontinued Operations 9687 0 2804 0 3770 0 0 0 0 0 0 9687 2804 3770 4859 Adjusted Net Income Income to Company Incl Extraordinary Items & Disc Ops 9615 4018 5331 6136 6.11 1.75 2.71 3.1 6.11 1.75 2.71 3.1 5.91 1.65 2.38 2.92 Earnings Per Share Basic - Excluding Extra Items & Disc Op Earnings Per Share Basic - Including Extra Items & Disc Op Earnings Per Share Diluted- Excluding Extra Items & Disc Op Earnings Per Share Diluted - Including Extra Items & Disc Op EPS Basic from Operations EPS Diluted from Ops Dividends Per Share Com Shares for Basic EPS Com Shares for Diluted EPS 5.91 5.01 4.87 1.38 1586 1640 1.65 3.06 2.9 1.2 2.38 2.88 2.52 0 1393 1676 2.92 0.23 0.23 0 1566 1675 1605 1687 XYZ Corporation ANNUAL BALANCE SHEET ($ thousands) 12/31/20 12/31/19 12/31/18 21/31/2017 24991 26388 ASSETS Cash & Equivalents Net Receivables Inventories Prepaid Expenses Other Current Assets 13764 0 12864 29514 25606 13642 0 14908 30240 22813 14039 0 14409 28096 14439 14714 0 12747 Total Current Assets Gross Plant Property & Equipment Accumulated Depreciation 78007 63750 12349 83670 44078 9275 81501 36679 69996 31662 5817 7429 Net Plant Property & Equipment Investments at Equity Other Investments Intangibles Deferred Charges Other Assets 51401 9201 18500 5947 0 31464 34803 8350 16006 6410 0 28438 29250 8094 14354 7228 0 25917 25845 6883 6954 8782 0 30962 194520 177677 166344 149422 0 TOTAL ASSETS LIABILITIES Long Term Debt Due In One Year Notes Payable Accounts Payable Taxes Payable Accrued Expenses Other Current Liabilities 0 0 19562 24062 0 5865 21977 0 14988 22529 0 5726 22458 14158 23621 0 4629 889 25166 0 5063 18245 4844 19789 Total Current Liabilities Long Term Debt Deferred Taxes Investment Tax Credit Other Liabilities 71466 43549 0 0 39182 65701 31853 0 0 44099 62412 22025 0 53992 10532 603 0 47295 0 38733 154197 0 141653 0 123170 0 112422 0 TOTAL LIABILITES Redeemable Noncontrolling Int. EQUITY Preferred Stock - Redeemable Preferred Stock - Nonredeemable 0 0 0 0 0 3109 0 0 10391 Total Preferred Stock Common Stock Capital Surplus Retained Earnings Less: Treasury Stock 0 0 15 27607 12249 0 0 16 28937 6504 3109 15 28780 10703 0 10391 14 23834 2005 0 0 Common Equity 39871 35457 39498 25853 Stockholder's Equity - Parent Nonredeemable Noncontrolling Int. 39871 452 35457 567 42607 567 36244 756 Stockholder's Equity - Total 40323 36024 43174 37000 TOTAL LIABILITIES & EQUITY COMMON SHARES OUTSTANDING 194520 1500 177677 1600 166344 1500 149422 1366.37
