You have been assigned to the audit of Ajax and Sons’ Housing services Inc. (ASHS) for its year ended December 31, 2022. You are very excited about this opportunity as it is your first assignment since your recent promotion to audit senior and you are anxious to “run your own show”. Your audit partner has given you the following information.

The company started 5 years ago and is in the business of providing repairs to homes in Greater Sudbury and Surrounding areas. There are 4 main regional managers for Chelmsford & Azilda, The Valley & Garson, Sudbury, and Lively and copper Cliff. The company is owned by Ajax Hitherson and his wife, Donna and her brother, Ajax’s brother-in law Carl. Their two sons, Raymond and Michael have been in the business since its inception as employees. Carl owns 5% of shareholdings but is inactive in the company’s day to day operations. He is happy to receive his share of profits in the form of dividends. Donna oversees the financial information but has no formal training. She is a self-taught bookkeeper that used tutorials and you tube to learn how to track revenues and expenses. The audit partner had a quick interview with Donna who had much to say about the day-to-day operations of the business. The conversation was recorded, and the transcription is included in Appendix 1. Ajax has his H.B. Comm from Laurentian University and is familiar with GAAP.

Ajax approached your firm looking to have the books and records audited. While his son’s currently get along well, he is concerned about future disagreements on the company if they decide to get married in the future. While they have no ownership of the company now, Ajax plans to include them as equity owners as part of succession within 5 to 10 years. He wants to give his sons some comfort that everything is always checked and is therefore going to be 100% accurate.

He also wonders about the potential for future growth. While the company has proven to be profitable, ASHS is at a crossroads. Michael is moving to Parry sound and would like to start up a satellite location. In order to accomplish this expansion into Parry Sound and surrounding areas it will need a substantial bank loan. In order to qualify for the loan, the bank has requested a current ratio of 2:1 as well as reviewed financial statements. Ajax isn’t sure what the bank means by reviewed financial statements, but he is sure an audit will be good enough. ASHS is not sure it wants to take on the risks associated with the rapid expansion; however, it would like to proceed to see if it qualifies for the loan. Afterwards, in the next year they will decide whether they should go forth with expansion.

Raymond, on the other hand is the “Wild Child” of the family. He is currently single and spends much of his free time at the local bars. He has even been known to splurge on a trip to Vegas every once in a while. He is in charge of ensuring that clients pay their invoices. Some payments are received in the form of cash, others by check and some by Etransfers.

Getting contracts

Contracts are obtained by homeowners looking for repair services. Sales staff will receive a call, go to the site and provide a quote, which must be approved by the manager in charge of that region. That manager can either increase or lower the quote if a competitor undercuts AHSH’s quote. Any unanticipated repairs get billed over and above the quote (water damage, mold). A 10% deposit is required before any work begins. Once the work is completed the clients have 10 days to pay the final invoices

Required:

1. Assess the firm’s independence and engagement acceptance

2. Discuss the impact of the current ratio on materiality for the engagement

3. Use the audit risk formula to determine detection risk by evaluating internal controls

Answer rating: 100% (QA)

Independence and Engagement Acceptance Before accepting the audit engagement it is essential to assess the firms independence to ensure that there is ... View the full answer