Ling, an audit manager, is planning the audit of Modern Technologies, Inc. (MT, Inc.), a manufacturer of electronic components. This is the first year that Ling’s audit firm has performed the audit for MT, Inc. Ling set the preliminary judgment about
materiality for the financial statements as a whole at $66,000 and is now in the process
of setting performance materiality for asset accounts. Asset balances for the current year (unaudited) and prior year (audited) are listed below, as well as Ling’s initial determination of performance materiality for each account. Based on preliminary discussions with management, a tour of the production facility, and background reading about the electronic components industry, Ling determines that MT, Inc., has strong credit policies, and most customers pay their full balance on time. Competition in the electronic components industry is high, and inventory can become obsolete quickly due to rapid technology changes. Production equipment is relatively specialized and additional investment is required when new electronic components are introduced.
Current Year
(unaudited)
Performance
Materiality
Prior Year
(audited)
Cash $ 397,565 $10,000 $ 356,122
Accounts receivable,
net of allowance
2,583,991 25,000 2,166,787
Inventory 1,953,845 15,000 1,555,782
Total current assets 4,935,401 4,078,691
Property, plant, and
equipment, net
1,556,342 20,000 1,458,963
Other assets 153,000 20,000 149,828
Total assets $6,644,743 $5,687,482
a. What factors should Ling consider in setting performance materiality for the asset
accounts?
b. Explain why Ling set performance materiality for cash at the lowest amount.
c. Explain why Ling set performance materiality for inventory at a lower amount as
compared to accounts receivable, PP&E, and other assets.
d. Explain why Ling set performance materiality for accounts receivable at the highest
amount.
e. Does setting materiality at a lower level result in collecting more or less audit evidence
(as compared to setting materiality at a higher level)?
