You are a partner at ABC CPA, and you are auditing December 31, 2020 financial statements of FlyPlane. FlyPlane is an airline in Canada and is a private company. You were hired to do this audit in the Summer of 2020. Prior to that FlyPlane was audited by XYZ CPA. who issued an unmodified opinion on FlyPlane’s 2019 financial statements. Per your communication with XYZ CPA, the audit team did not find many errors during their past audits, and overall considered the accounting of FlyPlane strong and the accounting personnel competent.

The company was founded by Ms. Jenny Smith and Mr. John Leblanc 10 years ago. Ms. Smith leads the executive team – she serves as the CEO. Mr. Leblanc is the COO of the company. They both have reputations of being aggressive business people, not afraid to bend the rules as long as it helps maximizing the value of the company. They believe this is the key to building a successful company. FlyPlane is owned by Ms. Smith, Mr. Leblanc, and ten investors who are not involved in the operations of the company.

FlyPlane is headquartered in Dorval. The company has flights all over North America and works with numerous partners in Canada, United States and Mexico, where regional and local airlines operate flights under the agreement with FlyPlane. FlyPlane operates a large fleet of airplanes, which are purchased from large aircraft manufacturers, and FlyPlane has been doing business with them for many years. Maintenance services for planes are provided by several maintenance companies. One of such companies is owned by Philippe Leblanc, the brother of John Leblanc. FlyPlane has passenger as well as cargo flights

Last year FlyPlane had a control weakness in their salary processing – the old accounting system did not properly record payments to employees. Per discussion with Mr. Leblanc, that issue was identified by the company’s controller last year. Mr. Leblanc informed you that in August 2020 the company implemented major updates to its accounting system, and the new system now correctly records all the salary expenses.

Statement of Financial Position
Fiscal Year		2020	2019
Cash		7,500	5,900
Accounts Receivable		60	90
PPE		12,100	12,800
Intangible Assets		1,100	1,000
Total Assets		20,760	19,790
Current Liabilities		8,100	7,800
Long Term Debt		11,200	8,000
Total Liabilities		19,300	15,800
Equity		1,460	3,990
Statement of Comprehensive Income
Fiscal Year		2020	2019
Revenue		5,800	15,100
Fuel Expense		1,300	4,300
Salary Expense		2,200	3,700
Depreciation Expense		1,800	2,000
Other Expenses		3,100	4,500
Net income		-2,600	600

Guidelines to calculate materiality:

– 3% to 7% of net income before taxes.

– 1% to 3% of total assets.

– 3% to 5% of shareholders’ equity.

– 1% to 3% of revenue.

– 1% to 3% of expenses.

– 0.5 to 5% of gross profit.

Q #	Question	Type your answer below
1	From the elements of the case, propose and justify an assessment of the acceptable audit risk for this client (HIGH / MODERATE-HIGH / MODERATE / MODERATE -LOW / LOW) (5 marks).
2	Assume the both the inherent risk and the control risk were assessed as HIGH. Indicate the consequences of your risk assessment (from the question above) on the planned detection risk and the quantity of evidence auditors will have to collect for the audit of FlyPlane. (3 marks)
3	Using the guidance and the financial statements above, propose and justify an assessment of the overall materiality level for the 2020 audit of this client, justify your choice (6 marks)

Answer rating: 100% (QA)

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