Question

For the following independent situations, assume that you are the audit partner on the engagement: 1. A number of frozen yogurt stores have opened in the last few years and your client, YogurtLand, has experienced a noticeable decline in customer traffic over the past several months that has caused you to have substantial doubt about YogurtLand’s ability to continue as a going concern. 2. Intelligis Electronics is a manufacturer of advanced electrical components. During the year, changes in the market resulted in a significant decrease in the demand for their products, which are now being sold significantly below cost. Management refuses to write off the products or to increase the reserve for obsolescence. 3. In the last 3 months of the current year, Oil Refining Company decided to change direction and go significantly into the oil drilling business. Management recognizes that this business is exceptionally risky and could jeopardize the success of its existing refining business, but there are significant potential rewards. During the short period of operation in drilling, the company has had three dry wells and no successes. The facts are adequately disclosed in footnotes. 4. Your client, Harrison Automotive, has changed from straight-line to sum-of-theyears’ digits depreciation. The effect on this year’s income is immaterial, but the effect in future years may be highly material. The change is not disclosed in the footnotes. 5. Circumstances prevent you from being able to observe the counting of inventory at Brentwood Industries. The inventory amount is material in relation to Brentwood Industries’ financial statements. But, you were able to perform alternative procedures to support the existence and valuation of the inventory at year-end. 6. Approximately 20 percent of the audit of Lumberton Farms, Inc., was performed by a different CPA firm, selected by you. You have reviewed their audit files and believe they did an excellent job on their portion of the audit. Nevertheless, you are unwilling to take complete responsibility for their work.

b. State the level of materiality as immaterial, material, or highly material. If you cannot decide the level of materiality, state the additional information needed to make a decision.

Answer 1

1. Yogurtland :-

In this case as an audit partner it is immaterial to me as the store is facing decline in customer traffic which may be completely based on poor marketing or advertising techniques of the store.

2. Intelligis Electronics :-

In this case as an audit partner it is immaterial to me as the decline in demand is due to changes in the market and to write off or obsolete the product is completely based on managerial decision making.

3. Oil refining company:-

In this case as an audit partner it is immaterial to me as the activities are completely based on management decision making. The facts were also not stated in the question as it is written there as adequate facts are disclosed in the footnotes which was actually not.

4. Harrison Automotive:-

In this case as an audit partner it is highly material to me as the organisation has changed it's depriciation calculation method. They have shifted from straight line method to sum of the years method which will effect the income and other financial activities in future.

5. Brentwood Industries:-

In this case as an audit partner it is material to me as it is stated that inventory amount is material to the organisation's financial statements and calculation of inventory was not possible due to unforseen circumstances. The alternative procedures used to support the valuation of inventory can lead to wrong calculations of the finacial statements which may affect the organisation in mere future. Presently, i have to rely on the alternative method used to calculate the existence and valuation of the inventory to prepare the financial statements.

6. Lumberton Firms:-

In this case it is material to me as I have refferd to that CPA firm to perform 20% of the audit and as per the statement I have reviewed the audit files and confirmed that they did an excellent job. So, as I am the reviewer and there can't be a denial of taking responsibility of their work.