Fall $2024$ COURSE OUTLINE FOR ACCT $3160,$ SECTION C

ACCT $3160$

Midterm Exam #$1$

Background

TechWave Solutions Inc. $($TechWave$$ or the $$Company$)$ is a privately owned software enterprise

based in Calgary, Alberta. Over the past three years, TechWave has achieved remarkable revenue

growth, primarily due to its innovative and customized software solutions for e$-$commerce.

Building on this success, TechWave is now planning to expand its operations into the United States.

This strategic move aims to capture a larger market share and further accelerate the Company$$s

growth. The U$.$S$.$ market o$$ers significant opportunities for TechWave, given the rapidly evolving

landscape of e$-$commerce platforms.

To support this ambitious expansion, TechWave is seeking a $$5,000,000$ loan from RBC$.$ This loan

will be crucial in establishing a U$.$S$.$ o$$ice$,$ which will serve as the central hub for the Company$$s

American operations. Additionally, the funds will be used to hire a team of skilled professionals,

including software developers, sales representatives, and customer support sta$,$ to ensure a

smooth entry into the new market. Furthermore, a portion of the loan will be allocated to robust

marketing and sales e$$orts aimed at increasing brand awareness and driving customer acquisition

in the United States.

As part of the loan application process, RBC requires an independent audit of TechWave$$s financial

statements for the past two years. This audit is essential to verify the Company$$s financial health

and stability, providing RBC with the assurance needed to approve the loan.

TechWave is confident that with financial backing from RBC$,$ it will successfully enter the U$.$S$.$

market, replicate its Canadian success, and continue its upward growth trajectory. The Company

remains committed to delivering high$-$quality software solutions that empower SMEs to thrive in an

increasingly digital world.

As the auditor for TechWave, you have been provided with the draft financial statements for the

years ended December $31,2023,$ and $2022,$ along with some supporting notes.

In your preliminary meeting with management, you learned that the software engineers integrated

an AI tool into the Market Maven platform during $2023$ and enhanced the user experience on other

platforms. However, in late $2022,$ the Company experienced a system glitch on its Trade Pulse

platform, leading to a decrease in contract renewals for this platform in $2023.$ To protect the

Company$$s brand reputation as it expands into new markets, management has decided to retire the

Trade Pulse platform in $2024.$

Question #$1$:

Identify the primary users of TechWave$$s audited financial statements. Discuss the various

stakeholders who rely on these statements and their specific interests and needs.

Question #$2$:

Explain the appropriate benchmarks for determining materiality in the context of TechWave$$s

audited financial statements. Discuss how these benchmarks align with the needs and

expectations of the users of these financial statements.

Question #$3$:

Calculate the materiality thresholds for the audits of TechWave$$s financial statements for the fiscal

years ending December $31,2023,$ and December $31,2022.$ Provide an explanation of the

methodology and rationale used in determining these thresholds.

Question #$4$:

Identify two accounts on TechWave$$s balance sheet that present a higher risk of material

misstatement. Provide a comprehensive explanation of why these accounts are considered higherrisk,

including the specific assertions related to these risks.

Question #$5$:

Identify two accounts on TechWave$$s income statement that present a higher risk of material

misstatement. Provide a thorough explanation of why these accounts are considered higher$-$risk,

including the specific assertions related to these risks.

Question #$6$:

Discuss any additional relevant considerations that should be taken into account during the audit

planning process for TechWave.

Appendix A $$ Draft Financial Statements for TechWave Solutions Inc.

TechWave Solutions Inc.

Income Statement

For the Years Ended December $31,2023$ and $2022$

Revenue $20232022$

Sales revenue $$5,000,000$ $$4,000,000$

Total Revenue $$5,000,000$ $$4,000,000$

Expenses

Research and Development Expenses $$800,000$ $$700,000$

Marketing and Sales Expenses $$600,000$ $$500,000$

General and Administrative Expenses $$700,000$ $$600,000$

Depreciation and Amortization $$200,000$ $$150,000$

Total Expenses $$2,300,000$ $$1,950,000$

Operating Income $$2,700,000$ $$2,050,000$

Interest Expense $$100,000$ $$80,000$

Income Before Taxes $$2,600,000$ $$1,970,000$

Income Tax Expense $$780,000$ $$590,000$

Net Income $$1,820,000$ $$1,380,000$

TechWave Solutions Inc.

Balance Sheet

As of December $31,2023$ and $2022$

Assets $20232022$

Current Assets

Cash and Cash Equivalents $$500,000$ $$400,000$

Accounts Receivable $$1,200,000$ $$1,000,000$

Inventory $$300,000$ $$250,000$

Prepaid Expenses $$100,000$ $$80,000$

Total Current Assets $$2,100,000$ $$1,730,000$

Non$-$Current Assets

I