Audit Risk

Hello Kim,

Please help me with the following question,

-You are planning the audit of Veryan Co, a new audit client which operates in the oil & gas
exploration industry. Companies wishing to operate in this industry require a licence which is valid
for 20 years. Veryan Co has been in existence for 30 years and has grown its revenue at an
average of 12% per annum. During your planning meeting you were informed that the forecast
profit before tax for this financial year is $9.5 million (prior year: $6 million) based on revenues of
$124 million (prior year: $100 million).

Which of the following is the LEAST appropriate materiality level to be used in the audit
of Veryan Co?
A $1.5 million
B $1.0 million
C $750,000
D $450,000

1. The answer is A.
2.Could you please explain how to reach the answer?The explanation given in the kit is a bit complicated to understand.

Thanks