Problem
RRI's financial statements are provided to:
1. The preferred shareholders who receive annual dividend payments: Dividends are paid when net income exceeds $100,000 and are calculated as: 50% × (net income - $100,000). The maximum salary for Sam and his wife, Lucky (who is RRI's office administrator), that can be expensed in the calculation of net income is $80,000 each.
2. The bank, with whom RRI has an operating line of credit: RRI has never drawn down the maximum on the line of credit, and RRI has a strong credit history with the bank.
RRI's 2021 draft financial statements reported the following balances:
Total customer revenues $ 450,000
Government grant revenue(1 ) 25,000
Payment of environmental penalty(2) 5,000
Salary of Sam and Lucky(3) 200,000
Net income before tax 135,000
Total assets 1,200,000
• Note 1: Non-renewable government grant to subsidize hiring of a student.
• Note 2: Payment for disposal of waste that was found to contain asbestos. RRI attempts to avoid this, but on some sites asbestos cannot be properly segregated, and unexpected penalties occur.
• Note 3: Regular salary of $160,000 plus discretionary bonus of $40,000.
Question: Perform a preliminary assessment of materiality for the 2021 audit.