Vought Industries (Vought) provides shipping services to major manufacturing companies. It has grown from a small partnership
Question:
Vought Industries (“Vought”) provides shipping services to major manufacturing companies. It has grown from a small partnership of four individuals with sales of $300,000 five years ago to a corporation with sales of $5,000,000 in the prior year. The unaudited financial statements for this fiscal year show total assets at fiscal year-end of $8,000,000, revenues of $5,500,000, and income before taxes of $240,000. When the corporation was formed two years ago, two of the partners sold their interest in the business and now the shares are 100% owned by the other two.
The company has never been audited and has realized that in order to secure long-term contracts, it will have to set up facilities in Europe. The company president told the auditor confidentially that the company paid a bribe to a government official in a European country, and so the president does not expect any trouble setting up its new facilities.
To raise funds for the expansion, the company has approached its bank for a loan. If the bank agrees to the loan, the funds will be advanced by a European bank affiliated with the Canadian bank. There are a lot of foreign currency transactions as the Canadian company is currently handling all European sales. At the beginning of the fiscal year, the company set up some new information technology infrastructure to try to strengthen its internal control. The main expenses are travel, wages, legal, and shipping costs. Your firm uses the following to calculate planning materiality: 0.5-1% of total assets 2-3% of revenues or expenses 5-8% of income before taxes
Required
Determine whether you would set the overall audit risk for this engagement as high, medium, or low for your audit of Vought.
Support the audit risk you have selected with three (3) reasons.
Propose planning materiality for your audit of Vought.
Support the materiality base you have chosen.
Calculate planning materiality (show your calculation) and support the percentage you have selected.
Financial Accounting A User Perspective
ISBN: 978-0470676608
6th Canadian Edition
Authors: Robert E Hoskin, Maureen R Fizzell, Donald C Cherry