This is want I need to do. I have everything done but the last two. It is the area where Tolerable Missstatement, Specific Accounts Requiring Lower Tolerable misstatement: I need the Current Asset Accounts and Current Liabiliy Accounts and their explanations. Can someone help with these last two questions?

6 Solutions Case 7.1

Anne Aylor, Inc.

Determination of Planning Materiality

and Tolerable Misstatement

MARK S. BEASLEY A?· FRANK A. BUCKLESS A?· STEVEN M. GLOVER A?· DOUGLAS F. PRAWITT

INSTRUCTIONAL OBJECTIVES

To provide experience with establishing planning materiality.

To provide experience with establishing tolerable misstatement for individual financial statement accounts.

To illustrate factors considered when establishing planning materiality.

To illustrate different materiality bases considered when establishing planning materiality.

To illustrate factors considered when determining tolerable misstatement for individual accounts.

To illustrate reasons why the sum of tolerable mis-statements commonly exceeds planning materiality.

KEY FACTS

Anne Aylor, Inc. (Anne Aylor) is a publicly traded company (New York Stock Exchange) that had 48,879,663 shares of common stock outstanding with a trading price of $22.57 as of the close of business on March 11, 2011. Anne Aylor is a leading national specialty retailer of better-quality womenAc€?cs apparel, shoes, and accessories

At the end of fiscal 2011, Anne Aylor operated approximately 584 retail stores located in 46 states under the name Anne Aylor.

Net revenue for fiscal 2011 was $1.2 billion and net income was $31 million.

Substantially all of the companyAc€?cs merchandise is developed in-house by its product design and development teams and sourced to 131 independent manufacturers located in 19 countries.

Merchandise is distributed to the companyAc€?cs retail stores through a single distribution center, located in Louisville, Kentucky.

Anne Aylor is required to have an integrated audit in accordance with the standards of the Public Company Accounting Oversight Board (PCAOB).

Donna Fontain, the audit partner, has performed a preliminary analysis of the Company and its performance and believes the likelihood of management fraud is low.

DonnaAc€?cs analysis of Anne AylorAc€?cs performance is documented in memo G3.

Current events have been documented by Donna in memo G4.

Planning materiality financial information is documented in schedule G 7.

No material misstatements were discovered during the prior year audit of Ann AylorAc€?cs financial statements.

The case was prepared by Mark S. Beasley, Ph.D. and Frank A. Buckless, Ph.D. of North Carolina State University and Steven M. Glover, Ph.D. and Douglas F. Prawitt, Ph.D. of Brigham Young University, as a basis for class discussion. It is not intended to illustrate either effective or ineffective handling of an administrative situation.

Copyright A?© 2012 by Pearson Education, Inc., Upper Saddle River, NJ 07458                                                                                      241

Section 7: Planning Materiality

USE OF CASE

Information from Ann Taylor Stores CorporationAc€?cs 3/20/2008 form 10-K report was used in developing this case (see www.anntaylor.com for more information on Ann Taylor Stores). The information presented in this case is not identical to the information presented in the Ann Taylor 10-K to simplify some of the reporting issues. Many students will find the determination of planning materiality and tolerable misstatement difficult to understand. This case assignment helps walk students through that process. The case assignment is best used in an undergraduate and graduating auditing course when audit risk and materiality are discussed. Instructors may want to consider simplifying this case assignment by dividing it into two parts. Part one could require students to determine planning materiality while part two could require students to determine tolerable misstatement for individual balance sheet accounts.

The approach we recommend for this assignment is to first ask students to review the case assignment materials and conduct a preliminary Ac€A?in-classAc€?? discussion addressing question 1. Students are then asked to complete question 2 outside of class. Once students have completed this assignment, it is important to discuss the solution with them to maximize their learning experience. Students will commonly provide diverse answers for this assignment. This provides an opportunity to highlight the subjective nature of some of these judgments as well as to point out that many audit approaches would be considered reasonable.

Cooperative learning activities can easily be adapted to this assignment. The cooperative learning activity called Roundtable could be used for the preliminary in-class discussion (requirement 1). The basic process for this activity is to have students meet in small groups to state aloud and write down on a single sheet of paper their ideas to a question asked by the instructor. For example, students could be asked to explain why different materiality bases are considered when establishing planning materiality. Once all students have had an opportunity to state their ideas and arrive at a group consensus, the instructor can randomly call on individual students to share their groupAc€?cs answer with the class.

The cooperative activity called Homework Review could be used to discuss the studentsAc€?c answers to requirement 2. The basic process for this activity is to have the students meet in small groups to compare and discuss their responses on the planning materiality and tolerable misstatement working papers. The tasks of explaining each response on the working papers and checking the accuracy of each explanation should be rotated among group members. After students have had the opportunity to review all their responses the instructor can randomly call on individual students to share their responses with the class. It is important for the instructor to randomly call on individual students to ensure that all students take responsibility for learning the material.

PROFESSIONAL STANDARDS

References to AU sections have been updated to reflect the new codification of ASB clarity standards. PCAOB standards are referenced by standard number. Relevant professional standards for this assignment are:

AICPA ASB Standards: AU Section 240 Ac€A?Consideration of Fraud in a Financial Statement Audit,Ac€?? AU Section 300 Ac€A?Planning an Audit,Ac€?? AU Section 315 Ac€A?Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement,Ac€?? and AU Section 320 "Materiality in Planning and Performing an Audit."

PCAOB Standards: AS8, "Audit Risk,Ac€?? AS9, "Audit Planning,Ac€?? AS11 "Consideration of Materiality in Planning and Performing an Audit," and AS12, "Identifying and Assessing Risks of Material MisstatementAc€??

Case 7.1: Anne Aylor, Inc.

QUESTIONS AND SUGGESTED SOLUTION

(1] Review Exhibits 1 and 2; audit memos G-3 and G-4; and audit schedules G-S, G-6 and G-7. Based on your review, answer each of the following questions:

 

Why are different materiality bases considered when determining planning materiality?

Why are different materiality thresholds relevant for different audit engagements?

.

Why is the materiality base that results in the smallest threshold generally used for planning purposes?

Why is the risk of management fraud considered when determining tolerable misstatement?

Why does the auditor not use the same tolerable misstatement amount or percentage of account balance for all financial statement accounts?

INSTRUCTOR RESOURCE MANUAL Ac€?? DO NOT COPY OR REDISTRIBUTE                                                                                 243

Section 7: Planning Materiality

Why does the combined total of individual account tolerable misstatements commonly exceed the estimate of planning materiality?

 

Why might certain trial balance amounts be projected when considering planning materiality?

 

(2] Based on your review of the Exhibits (1 and 2), audit memos (G 3 and G 4), complete audit schedules G 5, G 6, and G 7.

 

 

 

Anne Aylor, Inc.                                                                 Reference:           G 5

Planning Materiality Assessment                                       Prepared by:         (initial)

Year Ended: January 28, 2012                                            Date:                 (date)

Reviewed by:

Primary Users of Financial Statements (list):

Stockholders, customers, lenders, suppliers, and employees.

Materiality Bases (in thousands):

Base	Fiscal 2011 Actual Financial Statement Amounts	Fiscal 2012 Projected Financial Statement Amounts	Planning Materiality Levels
			Lower Limit		Upper Limit
			Percent	Dollar Amount	Percent	Dollar Amount
Income After Taxes	$31,102	$58,500	2	Â	7	Â
Net Revenues	$1,243,788	$1,355,400	0.5	Â	2	Â
Current Liabilities	$181,088	$194,700	2	Â	7	Â
Current Assets	$332,024	$379,900	2	Â	7	Â
Total Assets	$593,255	$640,300	0.5	Â	2	Â

Planning Materiality (in thousands):	$         $4,095	Â
Explanation:

INSTRUCTOR RESOURCE MANUAL Ac€?? DO NOT COPY OR REDISTRIBUTE

Anne Aylor, Inc.                                                                 Reference:           G 6

Tolerable Misstatement Assessment                                  Prepared by:       (initial)

Year Ended: January 28, 2012                                            Date:                       (date)

Reviewed by:

Likelihood of Management Fraud (check one):

?       Low Likelihood of Management Fraud

________ Reasonably Low Likelihood of Management Fraud

________ Moderate Likelihood of Management Fraud

Tolerable Misstatement (in thousands):

Planning Materiality: Multiplication Factor (0.75 if low likelihood of management fraud, 0.50 if reasonably low likelihood of management fraud, and 0.25 if moderate likelihood of management fraud).	$       ________ X		Â
Â			Â
Tolerable Misstatement (in thousands)		$                             _____
Â	Â	Â	Â

Specific Accounts Requiring Lower Tolerable Misstatement:

Account	Tolerable Misstatement
Current Asset Accounts	________
Explanation: Â
Current Liability Accounts	________
Explanation: Â
Â	Â
Explanation:
Â	Â
Explanation:
Â	Â
Explanation:
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Explanation:

Anne Aylor, Inc. Planning Materiality Financial Information Year Ended: January 28, 2012 All amonts are in thousands	Reference: Prepared by: Date: Reviewed by: 1/28/2012 Projected		Case 7.1: Anne Aylor, Inc. G 7		Â
			(initial)		Â
			(date)		Â
			Â		Â
			1/29/2011 Actual		Â
Net sales	$                   1,355,400		$                1,243,788		Â
Cost of sales	599,700		562,427		Â
Gross margin	755,700		681,361		Â
Selling, general and administrative expenses	659,800		627,622		Â
Restructuring charges	0		3,856		Â
Operating income/(loss	95,900		49,883		Â
Interest income	700		636		Â
Interest expense	1,200		1,009		Â
Income/(loss) before income taxes	95,400		49,510		Â
Income tax provision/(benefit)	36,900		18,408		Â
Net income/(loss)	$                       58,500		$                    31,102		Â
Assets	Â		Â		Â
Current assets	Â		Â		Â
Cash and cash equivalents	$                     156,600		$                   138,194		Â
Accounts receivable	12,100		12,670		Â
Merchandise inventories	133,800		111,229		Â
Refundable income taxes	18,400		16,394		Â
Deferred income taxes	19,400		23,542		Â
Prepaid expenses and other current assets	39,600		29,995		Â
Total current assets	379,900		332,024		Â
Property and equipment, net	229,700		240,641		Â
Deferred financing costs, net	500		640		Â
Deferred income taxes	21,600		15,574		Â
Other assets	8,600		4,376		Â
Total assets	$                     640,300		$                   593,255		Â
Liabilities and Stockholders' Equity	Â		Â		Â
Current liabilities	Â		Â		Â
Accounts payable	$                       67,200		$                    50,615		Â
Accrued salaries and bonus	20,300		21,154		Â
Accrued tenancy	29,400		29,512		Â
Gift certificates and merchandise credits redeemable	33,900		31,273		Â
Accrued expenses and other current liabilities	43,900		48,534		Â
Total current liabilities	194,700		181,088		Â
Deferred lease costs	114,200		120,945		Â
Deferred income taxes	600		1,042		Â
Long-term performance compensation	22,300		6,200		Â
Other liabilities	15,900		9,635		Â
Total liabilities	347,700		318,910		Â
Stockholders' equity		Â		Â
Common stock and paid in capital		553,900		511,847
Retained earnings		291,243		232,443
Accumulated other comprehensive loss		(1,600)		(2,734)
Treasury stock		(550,943)		(467,211)
Total stockholders' equity		292,600		274,345
Total liabilities and stockholders' equity		$                                     640,300		$              593,255
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INSTRUCTOR RESOURCE MANUAL Ac€?? DO NOT COPY OR REDISTRIBUTE