Lauralye Leasing Limited (LLL) provides lease financing to companies and individuals for equipment other than automobiles. Leases on commercial signs make up 50% of total leases, computer and telecommunications equipment are 30% and restaurant equipment makes up most of the remainder. LLL's customers arrange to buy new equipment from equipment dealers, then contact LLL to arrange lease financing.
LLL was founded over thirty years ago by Laura and Al Ye. It is now run by Mr. and Mrs. Ye's daughter, Betsy, who is the President of LLL. LLL owns a small building downtown, where the offices of the business are located. Unused office space is rented out to other commercial tenants.
Betsy was a classmate of yours at York University, and you have kept loosely in touch over the years. This year, she moved the audit to your firm (a local firm with five partners), deciding that the firm her parents had hired many years ago did not really understand her business' needs.
LLL has a small loan that is used to cover blips in working capital. The company has two salespeople. Most loans are received from stores throughout the city, with whom LLL has standing agreements. If customers require financing, they fill in an application at the store, which is faxed to LLL for approval. LLL will reply within two business days.
The company has been profitable for many years. There are no extraordinary items in the current year's financial statements.
Selected financial information is as follows:
Current assets $9,910,000
Long term assets $46,500,000
Short term liabilities $30,700,000
Shareholders' equity $25,710,000
Revenue $10,200,000
Expenses $5,600,000
Income before tax $4,600,000
(and before bonus)
Required:
A) Which base would you use to calculate materiality? Why?
B) Calculate materiality. Choose a specific number, and explain why you chose that amount.
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