Identify significant financial reporting risks and explain which key accounts are affected. For each account perform the following:

i. Assess inherent risk (risk of material misstatement prior to consideration of controls). Provide an explanation for your risk assessment and, where applicable, provide support with preliminary analytical review.

Assess Inherent Risk	Preliminary Analytical Review
The bonus plan based on the net income is a high inherent risk. OFS management has an incentive to show operations are profitable in order to receive a bonus. Also, FFIs reputation of having high expectations for a return on investment would put some pressure on management to overstate key figures.	Evaluate profitability and efficiency ratios to see performance and consistency in utilizing their assets and capital.
The forgivable loan from the Ontario government is a high inherent risk because OFS must meet the lenders condition of maintaining certain level of employment for 10 years to be deemed forgivable. Attracting and retaining employees is a challenge for any company, especially with limited opportunities for growth. Downsizing may result of full repayment of loan.	Compare debt ratios from previous years to understand OFSs ability to repay obligations.
The unknown compatibility of the new POS system with the accounting system is a high inherent risk. Not performing valid tests on time could possibly lead to numerous data processing issues.
Lack of proper training for the brand new POS for the staff and management is a high inherent risk for operations.	Verify company-wide announcements from the management on the rollout phase of this new POS to check if staff were advised of new system and that some training was involved.
The absence of any sales terminal throughout the entertainment complex makes OFS more susceptible to theft with the handling of cash.
The judgment with the lawsuit is a high inherent risk. OFSs accounting managers believe MN is bluffing but their faith depends on FFIs restructuring plans. MN has sufficient grounds to pursue for breach of contract they upheld only 8 yrs of their 20-yr lease agreement.

ii. Assess control risk and provide an explanation for your risk assessment.

Lack of segregation of duties - the handling of cash by the only employee of Marina indicates there is no clear segregation of duties. Tony not only accepts cash as the only method of payment from customers but must oversee customers signing the formal agreement, make a record of their name, confirm their boats name and dimensions, and refer to the OFS pricing chart for the correct annual docking fee. All those responsibilities fall on Tony so there is a high probability of human errors if controls are not in place to detect them.

Discarding the old sales terminals before completing the full installation and testing of new sales terminals throughout the entertainment complex was a control risk. They could have slowly phased out the old terminals once the new sales terminal tested positively for compatibility.

iii. Based upon your assessment of risk of material misstatement, explain the potential misstatement (i.e., over or understatement) for each identified account and what are the relevant assertion(s).

Accounts affected include revenue, accounts receivable, disclosures in financial statements.

The potential misstatement for the revenue account would be an overstatement to ensure their operations show their net income is profitable. This ties back to OFSs motivation to receive a bonus from FFI. The relevant assertion is occurrence.

The potential misstatement for accounts receivable would be an understatement due to the method of payment being cash and it is susceptible to theft. For example, OFS cannot record collections of cash if cash is stolen. They will report less because the cash is gone per say. The relevant assertion is completeness.

The potential misstatement for a contingent liability such as the lawsuit would be excluding it from the disclosures of the financial statements only. Under ASPE, this contingent liability still needs to be assessed for its likelihood or occurrence and potential estimate should the lawsuit result in a settlement in the end. Users need to be made aware even if the lawsuit is ongoing. The relevant assertions would be classification and valuations.

d. Based upon your risk assessment for each account, explain what type of audit approach would be most appropriate for that account/cycle.