Ana used 0.5-5 percent of gross profit in determining materiality of $70,000 in her audit of XYZ Inc., a company that builds replacement engines for tractors and combines. She used the $70,000 amount as her performance materiality, identifying account balances and transactions to be tested. She also used materiality as a guide when deciding on the appropriate audit opinion in her report.
Required
(a) Provide three other examples of a base (other than 0.5-5 percent of gross profit) that an auditor could use in determining materiality in a financial statement audit.
(b) Suppose Ana initially reviewed parts inventory account #102641-1 and found that none of the account transactions exceeded $45,000. Does this mean that none of these transactions should be selected for examination, based on her materiality decision of $70,000? Explain your answer.
