Question

Sunrise Solar Inc. (SSI) is a medium-sized company that is developing solar energy systems for private residences and small businesses. It is privately owned, with the majority of the shares held by the company’s president, Shu Mingfei. Started up two years ago, to date, it is mostly involved in research and development, but this year it completed its first customer sales and installation. Ms. Shu has engaged your firm to do the current year’s audit because she plans to obtain $20 million in debt financing from outside investors to allow further commercialization of the SSI systems. You are now reviewing SSI’s preliminary general ledger trial balance in order to begin preparing the audit planning.
The following is a summary of the accounts that appear in this trial balance as at year end:
ACCOUNT ............................ BALANCE DR/(CR)
Cash................................. $101,209
Accounts receivable......................... 85,019
Allowance for bad debts...................... (15,000)
Inventory, finished goods.................... 900,550
Inventory, work-in-progress.................... 44,666
Inventory, raw material...................... 67,890
Deferred development costs..................... 34,445
Property, plant, and equipment................... 3,700,990
Accumulated amortization, PPE................. . (901,108)
Patents, at cost .......................... 1,010,000
Accounts payable......................... (198,009)
Warranty provision........................ (30,000)
Shareholder loan, non interest bearing................ (11,000,000)
Share capital, common shares ..................... (1,000)
Retained earnings.............. ............. 1,364,767
Revenue............................. (812,202)
Cost of goods sold......................... 666,502
General and administration expenses................... 1,002,500
Research and development expenses................. 3,990,000
Other expenses........................... 89,990

Required:
a. Identify three factors that your firm should consider before agreeing to conduct the audit.
b. What are the economic and industry risks affecting this business? How would these risks affect the company’s financial statements and your overall audit strategy?
c. State the dollar amount you would consider an appropriate materiality level for planning this audit, giving your supporting reasons. Explain why the materiality judgment is one of the first important decisions your team must make in planning this audit.
d. List two analytical procedures you could perform using the trial balance data above (you are not required to calculate any ratios). Explain what each procedure can tell you about the risks in SSI’s financial statements. Give one example of additional information you would want to obtain to perform analytical procedures in this audit, and a reason why it would be useful.



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  • CreatedJanuary 09, 2015
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