Your firm has been engaged to do the current year’s audit of Dawood Ltd., a medium sized business involved in manufacturing television screens and monitors. Dawood is privately owned and its two shareholders have requested that the annual financial statements be audited for the first time this year. One of the shareholders manages the business; the other is not involved. You are now reviewing Dawood’s preliminary general ledger trial balance, shown below, to begin the audit planning.
ACCOUNT ....................... BALANCE DR/(CR)
Cash .......................... $10,009
Accounts receivable ..................... 167,090
Allowance for bad debts .................... (25,000)
Inventory, finished goods ................... 200,550
Inventory, work-in-progress ................... 94,601
Inventory, purchased components ................ 199,800
Inventory, parts ...................... 34,400
Property, plant, and equipment .................. 9,700,100
Accumulated amortization, PPE ................ (3,607,597)
Accounts payable ...................... (222,400)
Warranty provision ...................... (87,000)
Bank loan, long-term ...................... (1,000,000)
Share capital, common shares .................... (1,500,000)
Retained earnings ...................... (1,738,442)
Revenue ........................... (9,005,800)
Cost of goods sold ........................ 4,696,600
General and administration expenses ................. 1,902,500
Other expenses ......................... 180,589

Required:
a. When planning this audit, explain why it is important for Dawood’s auditor to understand its business, its environment, and its risks.
b. Determine an appropriate materiality level for preliminary audit planning purposes. Explain your reasons for selecting this materiality level.
c. List two analytical procedures you could perform using the trial balance data above. Explain what each procedure can tell you about the risks in Dawood’s financial statements and what further investigation the analytical results may suggest.
d. Identify two accounts that you feel would have the high risk of material misstatement, and two that you think would have the lowest. Explain the reasons for your risk assessments.
e. Assume you have determined that Dawood’s inventory account is a high risk item. Assess the risk of material misstatement for the inventory account, using the five principle assertions as the basis for your assessment. (You will probably have to make some assumptions since little information is available in the case. In a real audit, these assumptions are points you would want to enquire to obtain the information needed.) Give the reasons supporting your assessment.