You have been the auditor for Bob Edward Thomas Ltd. (BET) for twelve years, including the current year ended December 31, 2021. BET is a public company listed on the TSX. In the current year, an independent audit committee member was added to strengthen the committee's independence. BET sells casino equipment across North America. The following are facts about BET and financial information based on the preliminary analysis of the 2021 unaudited financial statements prepared by management.

• Due to COVID-19 domestic and international travel to Las Vegas, Reno, and Atlantic City is down substantially. Equipment sales for 2021 were still lower than 2019 but more than 2020.
• The Company started selling a new product line in 2021. This new product line produced a 40% gross margin and made up approximately 70% of 2021 sales.
• Sales of other equipment had fallen off significantly, but the VP of Sales expected that he could eventually sell all old product lines when the economy and life were back to "normal." The margin on this equipment in past years was 30%, but due to lack of demand in 2021 was sold at a significant discount and even at below cost. The Company agrees that this equipment can be sold for a profit, so no provision for obsolescence has been made.
• To reduce costs, the Company terminated their controller and hired a new controller that had just become a CPA in 2019. There were also significant decreases in employees in all departments.
• During the year, the president of BET provided a $1,500,000 loan at 12% per annum due on demand. The Company had not been successful in obtaining additional financing from either an additional loan or issuing shares to the public. For the Company to be able to repay the loan as quickly as possible, the president demanded that the auditor issue an unmodified opinion by the end of January 2022. The CEO asked to have the loan classified as long-term to ensure that any current bank covenant requirements would be met.
• There was an increase in the Company's number of days in accounts receivable during the year. The CEO was not concerned because it reflected the extension of credit terms to customers who purchased equipment from the new product line.
• The CFO and CEO had always been very cooperative, and previous year's audits had found very few misstatements. However, the two executives were concerned there may be problems this year due to the need for the audit to be finished quickly, so they asked the auditors to prepare the 2021 financial statements.
• The following is selected financial information:

	31-Dec-21	31-Dec-20
Total assets	8,200,000	6,000,000
Accounts receivable (net of allowance of nil)	1,800,000	1,200,000
Current assets	3,000,000	2,400,000
Current liabilities, excluding shareholder loan given in 2021	3,500,000	3,200,000
Total debt, including shareholder loan given in 2021	6,600,000	4,250,000
Total equity	1,600,000	1,250,000
Total sales revenue	10,000,000	7,500,000
Gross margin	7,500,000	5,250,000
Normalized net income before tax	500,000	(290,000)
Income after tax	350,000	(203,000)

a-Given the case facts, identify either one independence threat or prohibition. Explain why it is a threat or prohibition. Identify the steps that should be taken to reduce the threat to an acceptable level or remove the prohibition.

b-

Identify the one primary user and explaining why. Include in your answer what factor in the financial statements the user would use to make decisions for 2021. (2 marks)

c

Determine preliminary overall materiality based on the benchmark you feel is the most appropriate and state the qualitative factors and reasoning for your choice.

d

Based on the information given,

1 Identify and describe 3 significant risks of material misstatement at either the overall financial statement level or the financial statement assertion level. DO NOT IDENTIFY AS JUST INHERENT OR CONTROL RISK

2 Explain why this is a significant risk.

3 For each risk identified at the financial statement assertion level, identify the specific account being affected as well as the assertion (only one account and one assertion). For each risk identified at the overall financial statement level, explain how this overall risk affects the auditor's response.

e

Given the case facts, identify one factor that would potentially reduce audit risk for BET (1 mark)

f

Complete a vertical and horizontal analysis for accounts receivable only for the year ended December 31, 2021, compared to December 31, 2020. Based on this analysis and case facts, explain whether the difference is unusual and why. Indicate what assertion poses the most significant risk for accounts receivable and indicate why. The thresholds for determining if any changes are significant are $12,000 and 8%. (3 marks) (Where applicable show calculations for part marks)

g

Calculate the Company's debt to equity ratio as at December 31, 2021. Given that the Company's debt to equity ratio at December 31, 2020, was 3.4 to 1, explain whether the change in the ratio indicates a significant risk or not and why given that the Company's bank required a ratio of 4 to 1 in 2021. If there is an indication of significant risk, identify whether the risk is at the assertion or overall entity level and why. (3 marks) (Where applicable, show calculations for part marks)

h

Explain the two different audit approaches that the auditor can use to audit BET and indicate what the differences between the 2 methods are. Based on the case facts indicate the one approach you would recommend and why

Answer rating: 100% (QA)

Ans a One threat or prohibition is the full in the sales of equipment ... View the full answer