Determining Materiality Thresholds

The audit firm of DCG, LLP is performing an audit of Argo Co., a publicly traded company, for the year ended December 31, 2020. You have been given the assignment of assisting in the planning process for the audit by determining appropriate benchmarks and percentages to be used for overall planning materiality and for performance materiality. You have also been tasked with evaluating audit evidence upon completion of audit procedures to determine whether or not projected misstatements are deemed to be material.

In researching your firm’s guidance on establishing overall planning and performance materiality (see the “Argo Co. DGC Policies and Procedures” document), you learn that both quantitative and qualitative factors should be considered in materiality judgments. As such, you perform some preliminary research and identify the following qualitative factors that may be relevant to your materiality judgments:

Argo’s Vice President of Sales (VP-Sales) earns a $50,000 bonus if Argo’s 2020 sales are at least $25,120,000.

The analyst’s consensus forecast for Argo’s 2020 pre-tax income is $6,050,500.

In the audit of the 2019 financial statements, Argo’s external auditors determined that a material weakness in internal controls existed with relation to controls over land acquisitions and disposals.

Since the determination of overall planning materiality occurs before year end, DCG has computed projections of key financial statement balances for the purpose of determining overall planning materiality. The computed projections, as well as prior-year actual balances, are as follows:
Account 12/31/2020 Balance (projected) 12/31/2019 Balance (audited) 12/31/2018 Balance (audited)
Sales $25,354,128 $22,122,039 $23,346,943
Total Assets $19,885,320 $17,336,809 $18,204,143
Gross Profit $12,409,357 $10,819,457 $11,236,851
Pre-Tax Income $6,423,040 $5,615,674 $5,881,853

Requirement #1:

Review DCG’s policies and procedures pertaining to overall planning and performance materiality. The firm’s guidance is found in a file attached to this case (Argo Co. DCG Policies and Procedures document.pdf).

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