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9-36 (Objectives 9-2, 9-3, 9-6, 9-7, 9-8) Pamela Albright is the manager of the audit of Stanton Enterprises, a public company that manufactures formed steel subassemblies for other manufacturers. Albright is planning the 2011 audit and is considering an appropriate amount forplanning materiality, what tolerable misstatement should be allocated to the financial statement accounts, and the appropriate inherent risks. Summary financial
Trade accounts receivable Allowance for uncollectible accounts243,689 3,544,009$Prepaid expensesTotal current assetsProperty, plant, and equipment: At costLess accumulated depreciationTotal prop., plant, and equipment29,5008,218,100 12,945,255(4,382,990)8,562,265(120,000)Goodwill 1,200,000
Total assetsAccounts payableBank loan payableAccrued liabilitiesFederal income taxes payable Current portion of long-term debtTotal current liabilities Long-term debtStockholders’ equity: Common stock Additional paid-in capital Retained earningsTotal stockholders’ equityTotal liabilities and stockholders’ equity$17,980,365$$17,980,3652,141,552 150,000 723,600
1,200,000 240,0004,455,152 960,0001,250,000 2,469,921 8,845,29212,565,213$$12,548,6252,526,789 —598,020 1,759,000 240,0005,123,809 1,200,0001,000,000 1,333,801 3,891,015 6,224,816Combined Statement of Income and Retained EarningsSalesCost of goods sold
Gross profitSelling, general, and administrative expenses Pension costInterest expenseTotal operating expensesIncome before taxesIncome tax expenseNet incomeBeginning retained earningsDividends declared Ending retained earningsPreliminary 12-31-11$ 43,994,931 24,197,21219,797,719 10,592,221 1,117,845 83,37611,793,442
8,004,277 1,800,0006,204,277 3,891,01510,095,292 (1,250,000)$ 8,845,292Audited 12-31-10$32,258,015 19,032,22913,225,786 8,900,432 865,030 104,2209,869,6823,356,104 1,141,0002,215,104 2,675,911 4,891,015 (1,000,000)$ 3,891,015statement information is shown in Figure 9-8. Additional relevant planning information is summarized next.Stanton has been a client for 4 years, and Albright’s firm has always had a good rela- tionship with the company. Management and the accounting people have always been cooperative, honest, and positive about the audit and financial reporting. No material misstatements were found in the prior year’s audit. Albright’s firm has monitored the relationship carefully, because
when the audit was obtained, Leonard Stanton, the CEO, had the reputation of being a “high-flyer” and had been through bankruptcy at an earlier time in his career.Chapter 9 / MATERIALITY AND RISK 285FIGURE 9-9Stanton runs the company in an autocratic way, primarily because of a somewhat controlling personality. He believes that it is his job to make all the tough decisions. He delegates responsibility to others but is not always willing to delegate a commen- surate amount of authority.The industry in which Stanton participates has been in a favorable cycle the past few years and that trend is continuing in the current year. Industry profits are reasonably favorable, and there are no competitive or other apparent threats on the horizon.