Your firm has done the audit of ROI Manufacturing Inc. for many years. You are in charge of the fieldwork for the current years audit. ROI is a manufacturer of high-fashion clothing. Its shares are publicly traded, but a majority of the common shares are held by the members of the family that started the business during the 1960s. During the current year, ROIs business shrank substantially because it lost a major customer, a countrywide department store chain that went of the business. ROI has not been able to replace the lost business. Since many of ROIs long-time employees were happy to take an early retirement offer. ROI managements strategy now is to continue to operate only a few unique clothing brands that represented about 50% of its sales volume in prior years. The materiality level used in the prior years was $80,000. The audit partner has determined that the appropriate materiality for the current-year financial statement audit is $40,000.

Required:

a) Discuss the factors that the audit partner would have considered in deciding to reduce the materiality level. (3 marks)

b) What impact will the lower materiality level likely have on your audit procedures in the current year? (3 marks)

c) While reviewing the previous years audit file, you note that last years staff uncovered one error. ROI had failed to accrue approximately $50,000 of customer volume discounts because of a calculation error in computing the customers total sales. Since the error was less than the materiality, no adjustment was made to the prior years financial statements. Explain the impact this error had on the prior years financial statements; the impact it will have on the current years financial statements when it reverses; and the impact it will have on your audit, given your new materiality level. (4 marks)