Question 2
You, a recent auditor with a local auditing firm, are responsible for the audit of a new client, PresentShop, a retailer of electronic home and office equipment in Western Canada.
PresentShop has 14 locations across Western Canada. It specializes in providing customers with the latest technology in home entertainment electronics such as televisions and DVD players as well as top of the line office technology such as computers.
The business was started 15 years ago in Alberta by two brothers who are still the only owners of the company. The brothers paid themselves a management bonus in 2017 of $60,000. The business has grown as a result of excellent advertising, good locations, and reasonable prices based on the ability of the company to buy in volume. Each store has a high degree of security such as electronic bars and video surveillance.
The accounting for the stores is all electronically performed. The sales tills are downloaded every day to the main office in Calgary which performs the accounting for all of the stores. The main office also has the warehouse from which all inventory is shipped to the stores.
Business has been relatively stable but the company does have pressure from American competitors moving into Canada as well as another Western Canadian competitor, B&C Sound. As well, the business tends to fluctuate with the economic cycles so recent government cutbacks in B.C. have resulted in lower sales. As a result of a decrease in profits, the company requires a significant loan from a bank and the bank has requested audited financial statements. It is the first year that the financial statements have been audited. The bank intends to use the inventory as collateral for the loan.
PresentShop has provided you with the following financial information for the years ending December 31, 2017:
December 31, 2017
(â000s)
Total assets
$48,900
Total revenues
$124,900
Total net income before tax
$23,500
Total net income after tax
$15,400
Required:
Assess inherent risk at the overall financial statement level. Conclude on inherent risk. Is it low, medium or high?
Assess control risk at the overall financial statement level. Conclude on control risk. Is it low, medium or high?
Conclude on detection risk and the level of substantive testing required.
Assess overall (planning) materiality
Question 3
Explain the approach adopted by auditors of identifying accounts and related assertions at risk of material misstatement. How does this approach help auditors to reduce audit risk to an acceptably low level?
Question 4
What is the relationship between materiality and audit risk?
Question 2
You, a recent auditor with a local auditing firm, are responsible for the audit of a new client, PresentShop, a retailer of electronic home and office equipment in Western Canada.
PresentShop has 14 locations across Western Canada. It specializes in providing customers with the latest technology in home entertainment electronics such as televisions and DVD players as well as top of the line office technology such as computers.
The business was started 15 years ago in Alberta by two brothers who are still the only owners of the company. The brothers paid themselves a management bonus in 2017 of $60,000. The business has grown as a result of excellent advertising, good locations, and reasonable prices based on the ability of the company to buy in volume. Each store has a high degree of security such as electronic bars and video surveillance.
The accounting for the stores is all electronically performed. The sales tills are downloaded every day to the main office in Calgary which performs the accounting for all of the stores. The main office also has the warehouse from which all inventory is shipped to the stores.
Business has been relatively stable but the company does have pressure from American competitors moving into Canada as well as another Western Canadian competitor, B&C Sound. As well, the business tends to fluctuate with the economic cycles so recent government cutbacks in B.C. have resulted in lower sales. As a result of a decrease in profits, the company requires a significant loan from a bank and the bank has requested audited financial statements. It is the first year that the financial statements have been audited. The bank intends to use the inventory as collateral for the loan.
PresentShop has provided you with the following financial information for the years ending December 31, 2017:
| December 31, 2017 (â000s) | |
| Total assets | $48,900 |
| Total revenues | $124,900 |
| Total net income before tax | $23,500 |
| Total net income after tax | $15,400 |
Required:
Assess inherent risk at the overall financial statement level. Conclude on inherent risk. Is it low, medium or high?
Assess control risk at the overall financial statement level. Conclude on control risk. Is it low, medium or high?
Conclude on detection risk and the level of substantive testing required.
Assess overall (planning) materiality
Question 3
Explain the approach adopted by auditors of identifying accounts and related assertions at risk of material misstatement. How does this approach help auditors to reduce audit risk to an acceptably low level?
Question 4
What is the relationship between materiality and audit risk?
