IndaCar Inc. (IC) operates a high-end car rental agency that specializes in the rental of unique vehicles and is located next to Lester B. Pearson International Airport in Toronto. IC is a private Canadian company that is wholly owned by Jake Bouvier.
Daytona Lemans LLP Chartered Accountants (DL), has reviewed IC's annual financial statements since IC was founded five years ago and has experienced no significant problems when performing the previous review engagements. You just found out you are the manager on the job for this year.
As a result of IC's success in Toronto, Jake is exploring the possibility of expanding IC's operations to include the Vancouver and Calgary airports. Jake expects that he will be using IC's fiscal 2012 financial statements to attract equity investors to partially finance this expansion.
To maximize IC's share value attractiveness to potential investors, Jake is wondering if he should have the financial statements audited.
Jake commented that he received a tip from one of the employees at the Pearson location that the manager is stealing cash. He wants to know if the regular audit engagement is likely to identify whether cash is being stolen and what procedures the auditor is likely to perform in this risk area.
You have reviewed the fiscal 2011 engagement file in order to familiarize yourself with the client and to review the planning documentation prepared for the previous year's engagement.

Required
(a) Advise Jake on the costs and benefits of upgrading from a review engagement to an audit engagement.
(b) In planning the audit, the auditor must consider audit risk. Using the above case facts, make an inherent risk assessment.
(c) If the auditor decides that control risk is high, what type of audit will DL perform? How will this impact the amount of audit work?
(d) Calculate and conclude on the most appropriate planning materiality, and include a detailed explanation supporting your decision.
(e) For the following accounts, what assertions will the auditor be most concerned with? What evidence should the auditor gather to verify the management assertions?
1. Accounts receivable
2. Property, plant, and equipment
3. Accounts payable
4. Long-term debt
5. Car rental sales

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IndaCar Inc. As at December 31 (in thousands of dollars) 2012 2011 (unaudited) Assets Cash Accounts receivable Inventory Prepaid expenses s 1,453 1,142 1,270 112 3,977 $ 162 130 1,140 1,435 20,657 2,000 22,657 14,465 Property, plant, and equipment (net) Investments 14,465 $26.634 $15,900 Liabilities Bank operating loan Accounts payable and accrued liabilities $ 90 1.225 1,315 1,260 2.575 $ 100 166 266 200 466 Long term debt Shareholders' Equity Common shares Retained earnings 100 23.959 24,059 $26,634 100 15,334 15,434 $15,900 EXCERPTS FROM THE INCOME STATEMENT For the years ended December 31 in thousands of dollars) 2012 2011 (audited) (unaudited) evenues Car rentals investment income $22,710 6,085 $14,300 4.485 18,785 28,795 Vehicle operations, including amortization Rent and administration Wages and salaries Total expenses ncome before income tax Income tax Net income 10,670 995 7.200 18,865 9,930 1,305 $ 8,625 8,870 810 6.675 16.355 2.430 780 1,650