You have a publicly traded audit client with the following characteristics $100,

Question

You have a publicly traded audit client with the following characteristics $100,000,000 in net income before taxes 10,000,000 shares of stock outstanding Analyst expectations of $8.00 earnings per share A loan covenant that requires earnings per share of $9.00 per share. The loan must be repaid immediately if earning per share fall below $9. Your firm's policy is to set materiality at between 3 and 7 % of income before taxes. subject to your professional judgment. What materiality amount would you set in this case and why?

Explanation / Answer

The materiality for a publicly traded company has a policy to set materiality, is generally between 3 and 7 % of income before taxes.

Analysis shown that participants with 7% materiality treatment makes higher estimates of what audit materiality should be and are more confident of the investment decisions made than the participants in 3% materiality treatment.

hence the materiality amount in the following case would be ($ 1000,000,000 * 7%)= $70,000,000 before income taxes.

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