Gothic Kings Ltd. Is a 100% owned subsidiary of Hadrian Inc. Gothic has been profitable in the past but incurred a loss for the year ended December 31, 20X3. Hadrian has indicated that if Gothic incurs another loss, the company will be put up for sale. Gothic is taking several steps to remedy the profit situation, including expanding into new markets which requires new investments.
The company has applied to a financial institution for financing for the expansion. The financial institution has indicated it will need audited financial statements before a loan can be approved. It will also require a minimum current ratio of 2:1
You are the new auditor (assume all appropriate client acceptance procedures have been performed and are satisfactory) and you have been provided draft financials containing the following information:
|
Revenue |
$2,057,505 |
|
Net income before tax |
$(163,844) |
|
Total assets |
$4,808,980 |
|
Total equity |
$1,730394 |
Additional information:
• A $100,000 bonus was paid to Gothic’s management team in 20X3 for reaching a set revenue target ($2 million in sales).
• During 20X6, HHI sold a warehouse. The loss on the sale of the warehouse totalled $300,000.
Required:
Determine the various materiality levels that should be used for the audit. Your submission should provide responses to each of the steps covered in class notes. Be sure to provide full explanations and justifications for your choices.
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