You are an audit manager in the firm of Stark, Evans and Banner, a full-service, medium-sized...

     

Transcribed Image Text:

You are an audit manager in the firm of Stark, Evans and Banner, a full-service, medium-sized public accounting firm specializing in audits and reviews of medium- Sized private and small public companies. In preparation for the coming year-end audit of your new client, Guardians Outdoors Ltd. ("Guardians"), you are reviewing the draft audit plan prepared by a senior auditor. In the past, the financial statements of Guardians were reviewed by another, smaller accounting firm. Guardians manufactures and distributes compasses and GPS receivers for outdoor enthusiasts and professionals. The company was started by two brothers, an engineer and a geologist, who developed a unique compass and a series of surveying instruments that were patented and became very popular among geologists and landscape surveyors. This year, instead of the review that was obtained in the past, the company requires audited financial statements because it is seeking financing for a major expansion project into foreign markets Based on your review of the draft audit plan and the draft financial statements, you have noted the following Given that Guardians has had revenues of nearly $10 million during each of the last three years and the company projects that revenues will continue to grow at a slow but steady pace, the owners have indicated that they would prefer increased assurance regarding the financial statements. The unaudited financial statements show total assets at fiscal year-end of $15,000,000, revenues of $10,500,000, and income before taxes of $840,000. The audit senior performed an analysis of the client's business and industry and indicated the following about key industry trends and the current state of the company: Guardians has performed well relative to competitors during the recent recession because of its dominance in the niche market for compass and measuring instruments, and because of its long-term relationships with large customers such as mining companies and sports equipment retail chains. However, current global trends and travel restrictions have caused a significant decrease in travelling and tourism. Guardians plans to seek substantial debt financing from a large national bank in order to open offices and lease warehousing facilities in Russia and China. The two founding brothers act as co-chairs of the board of directors. The client does not have an audit committee. Decisions about accounting policies and controls are made by the CFO, in consultation with CEO and COO The board of directors has two outside members, who are executives at Guardians' main business partners (a major supplier and one of the main customers) and long-time friends of the two founding brothers. 3 The planning materiality level for the engagement proposed by the audit senior is to be set at $100,000. The audit plan mentions that the materiality level is at the high-end of the range for pre-tax income because the client has not had any major accounting issues in the past, appears to generate a steady profit, and consistently expands its sales. b) Identify 2 major issues related to the significant risks in the audit of Guardians' financial statements. For each major issue, identify the risk [1 mark each] and explain why this is a significant risk [1 mark each]. [4 total marks] Significant risk #1 Why this is a significant risk?: Significant risk #2: Why this is a significant risk? c) Comment on the approprateness of the planning materiality proposed by the audit senior [3 marks] d) The audit senior assigned to the engagement has recently joined your audit firm after spending last summer working at Guardians in the warehouse fulfilling sales orders They were added to the engagement team due to their strong knowledge and familiarify with the client, the business and the industry. Comment on the addition of the audit senior to the engagement team. [2 marks] You are an audit manager in the firm of Stark, Evans and Banner, a full-service, medium-sized public accounting firm specializing in audits and reviews of medium- Sized private and small public companies. In preparation for the coming year-end audit of your new client, Guardians Outdoors Ltd. ("Guardians"), you are reviewing the draft audit plan prepared by a senior auditor. In the past, the financial statements of Guardians were reviewed by another, smaller accounting firm. Guardians manufactures and distributes compasses and GPS receivers for outdoor enthusiasts and professionals. The company was started by two brothers, an engineer and a geologist, who developed a unique compass and a series of surveying instruments that were patented and became very popular among geologists and landscape surveyors. This year, instead of the review that was obtained in the past, the company requires audited financial statements because it is seeking financing for a major expansion project into foreign markets Based on your review of the draft audit plan and the draft financial statements, you have noted the following Given that Guardians has had revenues of nearly $10 million during each of the last three years and the company projects that revenues will continue to grow at a slow but steady pace, the owners have indicated that they would prefer increased assurance regarding the financial statements. The unaudited financial statements show total assets at fiscal year-end of $15,000,000, revenues of $10,500,000, and income before taxes of $840,000. The audit senior performed an analysis of the client's business and industry and indicated the following about key industry trends and the current state of the company: Guardians has performed well relative to competitors during the recent recession because of its dominance in the niche market for compass and measuring instruments, and because of its long-term relationships with large customers such as mining companies and sports equipment retail chains. However, current global trends and travel restrictions have caused a significant decrease in travelling and tourism. Guardians plans to seek substantial debt financing from a large national bank in order to open offices and lease warehousing facilities in Russia and China. The two founding brothers act as co-chairs of the board of directors. The client does not have an audit committee. Decisions about accounting policies and controls are made by the CFO, in consultation with CEO and COO The board of directors has two outside members, who are executives at Guardians' main business partners (a major supplier and one of the main customers) and long-time friends of the two founding brothers. 3 The planning materiality level for the engagement proposed by the audit senior is to be set at $100,000. The audit plan mentions that the materiality level is at the high-end of the range for pre-tax income because the client has not had any major accounting issues in the past, appears to generate a steady profit, and consistently expands its sales. b) Identify 2 major issues related to the significant risks in the audit of Guardians' financial statements. For each major issue, identify the risk [1 mark each] and explain why this is a significant risk [1 mark each]. [4 total marks] Significant risk #1 Why this is a significant risk?: Significant risk #2: Why this is a significant risk? c) Comment on the approprateness of the planning materiality proposed by the audit senior [3 marks] d) The audit senior assigned to the engagement has recently joined your audit firm after spending last summer working at Guardians in the warehouse fulfilling sales orders They were added to the engagement team due to their strong knowledge and familiarify with the client, the business and the industry. Comment on the addition of the audit senior to the engagement team. [2 marks]

Answer rating: 100% (QA)

The question seek to expose the unaudited disposition of the financial statements to determine the true underlying positions and performance of the fi... View the full answer