| Course | ACC 421 Auditing and Forensic Accounting |
|---|---|
| Module | Module 2 |
| Paper type | undergraduate audit planning assignment with materiality and risk assessment |
| Length | About 1,040 words, 6 pages |
| Format | APA 7 student paper |
| School | Southern New Hampshire University |
| Program | BS Accounting |
| Updated | October 2026 |
Free sample paper for ACC 421 Module 2
Planning the Audit of a Composite Uniform and Linen Rental Company: Materiality and Risk of Material Misstatement
[Student Name]
Southern New Hampshire University
ACC 421: Auditing and Forensic Accounting
Module Two Assignment
[Instructor Name]
[Date]
The organization, setting and figures below are a composite written as a model document. No real employer, client, colleague or patient is described.
Planning the Audit of a Composite Uniform and Linen Rental Company: Materiality and Risk of Material Misstatement
Introduction
A family-owned uniform and linen rental company in central Ohio has engaged a regional CPA firm to audit its financial statements for the year, as required by its bank loan agreement. The company rents and launders uniforms, aprons, towels, mats and table linens for about 4,200 restaurants, clinics and factories, delivering weekly on 31 routes from one laundry plant. Revenue is about $52 million, pretax income about $3.6 million and total assets $38.5 million. This assignment documents the understanding of the business, sets materiality and assesses the risk of material misstatement for the main account areas, which together determine the audit plan (Arens et al., 2020).
Understanding the Business
Five features of the business shape the audit. Revenue is billed weekly from route drivers' handheld devices, based on items delivered and contract prices that escalate annually, so pricing errors and missed escalations are possible. About 15 percent of customers, mostly small restaurants, pay drivers in cash or by check at delivery, creating a risk that collections are diverted. Rental garments are carried as inventory and amortized over their expected service lives, so their valuation depends on estimates of wear and loss. The company's bank loan requires a debt service coverage ratio of 1.25, and last year's ratio was 1.31, which gives management an incentive to report higher income. And the accounts payable function is run by one long-time clerk who both sets up vendors and processes payments.
Preliminary Analytical Procedures
Revenue rose 6 percent, consistent with two new hospital contracts and a 3 percent average price increase. Two relationships stood out. Repair and maintenance expense rose 31 percent while plant equipment was largely unchanged, and amortization of rental garments fell as a percentage of rental revenue, from 18.4 percent to 16.9 percent. Each could have an innocent explanation, but each is noted for follow-up, because preliminary analytics are most useful for pointing to where the audit should look.
Materiality
Table 1. Materiality Levels
| Measure | Basis | Amount |
|---|---|---|
| Overall materiality | 0.5% of revenue of $52,000,000 | $260,000 |
| Performance materiality | 65% of overall materiality | 169,000 |
| Clearly trivial threshold | 5% of overall materiality | 13,000 |
Pretax income is the most common benchmark for profitable companies, and 5 percent of it would be about $182,000. But this company's income swings sharply with laundry chemical, natural gas and labor costs, and the bank, the main user, focuses on revenue and cash flow. Revenue is therefore the more stable benchmark (Messier et al., 2005). Performance materiality sits at 65 percent, toward the cautious end of the usual range, since this is a first-year engagement for the audit team and some controls are known to be weak. Misstatements below $13,000 will not be accumulated.
Risk Assessment
Table 2. Risk of Material Misstatement by Area
| Account and assertion | Inherent risk | Control risk | Basis | Planned detection risk |
|---|---|---|---|---|
| Revenue, occurrence and cutoff | High | Moderate | Presumed fraud risk; covenant pressure; weekly billing near year end | Low |
| Cash collected by drivers, completeness | High | High | Cash handled by drivers; reconciliation by route supervisor only | Low |
| Rental garment inventory, valuation | High | Moderate | Amortization lives are estimates; amortization ratio fell | Low |
| Accounts payable and expenses, occurrence | Moderate | High | One clerk sets up vendors and processes payments; repair expense up 31% | Low |
| Payroll, occurrence and accuracy | Low | Low | Outsourced payroll provider with independent report on its controls | Moderate |
Allen et al. (2006) summarize research showing that auditors' risk assessments are often insufficiently linked to the procedures they actually perform. Here each rating carries an explicit response. Where detection risk is low, the audit will use larger samples, do their testing close to the balance sheet date instead of in the fall, and favor evidence from outside the company, such as confirmations, over internal documents.
Planned Response
For revenue, the team will perform a detailed cutoff test of the last and first two weeks of billing, confirm balances with a sample of customers and test annual price escalations against contracts. For driver cash, it will test the nightly reconciliation of handheld collections to deposits and compare cash customers' payment patterns with prior years. For garment inventory, it will evaluate the amortization lives against the company's own replacement data. For payables, it will review the vendor master file for vendors with no physical address, test new vendors added during the year and investigate the increase in repair expense. Payroll will rely partly on the provider's controls report.
Fraud Risk in Planning
Auditing standards require the engagement team to discuss, before fieldwork, how the client's statements could be misstated by fraud. For this client the discussion centered on three scenarios. Management could inflate revenue near year end to protect the loan covenant, for example by billing deliveries that occur in early January. Drivers could pocket cash payments from small restaurants and cover the gap with credits for lost garments. And the payables clerk, who controls both the vendor list and payments, could create a vendor and pay it for services never received. Each scenario maps to a high-risk row in Table 2, and each will receive at least one procedure that management would not expect, such as testing a sample of credits issued to cash customers or visiting a vendor address. The team will also test journal entries posted after hours or by senior staff near year end, a required response to the risk of management override.
Communication and Timing
The planning conclusions will be communicated to the owner and the board in a planning letter that describes the scope, the significant risks and the timing of fieldwork. Interim work on controls is scheduled for October, the inventory observation and garment count for the last weekend of the year, and final fieldwork for February, giving the company time to close its books and the team time to complete the confirmations before the bank's March deadline.
Conclusion
The audit will use overall materiality of $260,000, performance materiality of $169,000 and a trivial threshold of $13,000. Four areas carry high risk of material misstatement, revenue, driver cash, garment inventory and payables, and receive low planned detection risk with more extensive, year-end, externally sourced evidence. Two analytical anomalies, the rise in repair expense and the fall in garment amortization, will be followed up early in fieldwork.
References
Allen, R. D., Hermanson, D. R., Kozloski, T. M., & Ramsay, R. J. (2006). Auditor risk assessment: Insights from the academic literature. Accounting Horizons, 20(2), 157-177. https://doi.org/10.2308/acch.2006.20.2.157
Arens, A. A., Elder, R. J., Beasley, M. S., & Hogan, C. E. (2020). Auditing and assurance services (17th ed.). Pearson.
Messier, W. F., Martinov-Bennie, N., & Eilifsen, A. (2005). A review and integration of empirical research on materiality: Two decades later. Auditing: A Journal of Practice & Theory, 24(2), 153-187. https://doi.org/10.2308/aud.2005.24.2.153
What the ACC 421 Module 2 instructions ask for
The Module Two assignment in ACC 421 usually asks you to plan an audit for a client described in a case. Expect to gather an understanding of the client's business and industry, perform preliminary analytical procedures, set overall materiality and performance materiality with a stated benchmark, and assess the risk of material misstatement at the account and assertion level by considering inherent and control risk. Many versions ask for a risk matrix and a description of how the assessed risks change the nature, timing and extent of testing. Justify the benchmark and percentage you choose, link each risk to the client's specific circumstances and explain how risk drives detection risk and the amount of substantive evidence needed.
How this ACC 421 Module 2 audit planning and materiality assignment example is built
The sample plans the audit of a linen rental company. It describes route-based revenue, rental garments carried as inventory and amortized as they wear, cash collected by drivers from small restaurants, and a bank loan with a debt coverage covenant. Because pretax income swings with laundry costs, materiality uses revenue: 0.5 percent of $52 million, or $260,000, with performance materiality at 65 percent, $169,000, and a trivial threshold of $13,000. A risk matrix rates revenue cutoff and driver cash collections high, garment inventory valuation high, payables moderate and payroll low. Detection risk is set low for the high-risk areas, which means larger samples, year-end testing and more direct evidence.
Where the ACC 421 Module 2 rubric puts the points
Rubrics for the ACC 421 planning assignment typically score the understanding of the client, preliminary analytics, materiality, risk assessment by assertion and the link between risk and planned procedures. Top papers justify the materiality benchmark for this client, explain performance materiality and the trivial threshold, assess inherent and control risk separately with client-specific reasons, and show how a high risk changes the audit response. Graders reward recognition of fraud risks in planning, especially revenue recognition. Common deductions include materiality with no benchmark rationale, generic risks that could apply to any company and a risk matrix that never connects to procedures. Papers that show how one high-risk rating changes sample sizes or timing tend to earn the top band on the linkage row.
ACC 421 Module 2 help: the mistakes that cost points
Planning papers lose points most often by listing textbook risks that apply to every client, by computing materiality and never using it, and by rating control risk low without evidence that controls work. Another frequent gap is treating revenue as low risk when auditing standards presume a fraud risk in revenue recognition. If your case is a nonprofit, a public company or a service firm, the benchmarks and risks differ but the logic is the same, and we can plan from your facts. Start by asking where this particular client's money moves in ways that are hard to see; those places become the high-risk rows of the matrix.
Get ACC 421 Module 2 written to your instructions
Send the ACC 421 Module 2 case and instructions. The paper will describe the client's business risks, set and justify materiality levels, rate inherent and control risk by account and assertion, and explain the planned audit response. Your first one is free of charge; two days is typical. The paper above is an original model document written by our desk, not a submitted student paper and not an official Southern New Hampshire University document.
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ACC 421 Module 2 questions, answered
Where can I find a free ACC 421 Module 2 audit planning sample?
This page carries a full ACC 421 Module 2 audit planning assignment with materiality levels and a risk matrix for a linen rental company.
How is overall materiality determined?
By applying a percentage to a benchmark that users focus on, such as 5 percent of pretax income or 0.5 to 1 percent of revenue or assets, adjusted for the client's circumstances.
What is performance materiality?
An amount set below overall materiality, often 50 to 75 percent of it, to reduce the chance that undetected and uncorrected misstatements together exceed materiality.
How does risk of material misstatement affect detection risk?
Higher assessed inherent and control risk require lower detection risk, which means more extensive, more persuasive and better-timed substantive procedures.
Why is revenue recognition presumed to be a fraud risk?
Because revenue is the account most often manipulated in financial statement fraud, auditing standards require auditors to presume a fraud risk there unless rebutted.