Panzero Bread is a major retailer of specialty sandwich itemsand baked goods. The following information represents the com-panyââ¬â¢s financial position as of 12/31/14 and 12/31/13. 12/31/14(unaudited) 12/31/13 (audited) Total assets $698,752,000$542,609,000 Accounts receivable $25,152,000 $19,041,000 Totalsales $1,066,691,000 $828,971,000 Cost of goods sold $842,255,000$628,534,000 Net income $57,456,000 $58,849,000 Earnings per share$1.81 $1.88 The auditor of Panzero Bread identifies the company asa client with high audit risk and has set the posting thresholdsfor individ- ual accounts at 10% of overall financial statementmateriality levels. The auditors have detected an overstatement ofaccounts receivable of $345,000. The misstatement is not a surpriseto the auditors, as they have detected misstatements in thisaccount in the past. On a per share basis, the misstatementrepresents $0.01 of earnings per share. The auditor believes thatthe misstatement should be corrected. Management argues stronglythat they prefer not to make the correction because they do notbelieve it is mate- rial; that is, the misstatement represents justover 1% of the account balance. Although left unsaid, the auditorknows that management is under considerable pressure from WallStreet to meet analyst expectations for earnings per share.Reducing earnings per share by even $0.01 would cause the trend inearnings to become even more negative than the unaudited financialnumbers already reveal, and it would cause the company to just missanalyst forecasts for earnings per share. a. Use the three commonbenchmarks for making materiality judgments (net income, totalassets, and net sales) to establish materiality for the financialstatements overall. b. What difficulties does the auditor face whenthe alternative benchmarks yield differing conclusions aboutmateriality? What qualitative factors should the auditor considerin making its materiality judgment in that case? c. Articulate areason for choosing one particular benchmark among the threecalculated in part (a), and use that benchmark to calculate theposting (clearly trivial) threshold for the accounts receivableaccount. d. What effect will the qualitative factors in this casehave on the auditorââ¬â¢s posting (clearly trivial) threshold for theaccounts receivable account?
Panzero Bread is a major retailer of specialty sandwich itemsand baked goods. The following information represents the com-panyââ¬â¢s financial position as of 12/31/14 and 12/31/13. 12/31/14(unaudited) 12/31/13 (audited) Total assets $698,752,000$542,609,000 Accounts receivable $25,152,000 $19,041,000 Totalsales $1,066,691,000 $828,971,000 Cost of goods sold $842,255,000$628,534,000 Net income $57,456,000 $58,849,000 Earnings per share$1.81 $1.88 The auditor of Panzero Bread identifies the company asa client with high audit risk and has set the posting thresholdsfor individ- ual accounts at 10% of overall financial statementmateriality levels. The auditors have detected an overstatement ofaccounts receivable of $345,000. The misstatement is not a surpriseto the auditors, as they have detected misstatements in thisaccount in the past. On a per share basis, the misstatementrepresents $0.01 of earnings per share. The auditor believes thatthe misstatement should be corrected. Management argues stronglythat they prefer not to make the correction because they do notbelieve it is mate- rial; that is, the misstatement represents justover 1% of the account balance. Although left unsaid, the auditorknows that management is under considerable pressure from WallStreet to meet analyst expectations for earnings per share.Reducing earnings per share by even $0.01 would cause the trend inearnings to become even more negative than the unaudited financialnumbers already reveal, and it would cause the company to just missanalyst forecasts for earnings per share. a. Use the three commonbenchmarks for making materiality judgments (net income, totalassets, and net sales) to establish materiality for the financialstatements overall. b. What difficulties does the auditor face whenthe alternative benchmarks yield differing conclusions aboutmateriality? What qualitative factors should the auditor considerin making its materiality judgment in that case? c. Articulate areason for choosing one particular benchmark among the threecalculated in part (a), and use that benchmark to calculate theposting (clearly trivial) threshold for the accounts receivableaccount. d. What effect will the qualitative factors in this casehave on the auditorââ¬â¢s posting (clearly trivial) threshold for theaccounts receivable account?
