Sisters Inc. beauty salon is a 100 percent subsidiary of Benefit Beauty Supply Inc., a beauty supply company.

As a result of this relationship, there were several transactions between the two entities during the past year. Sisters rented retail space for its salon from Benefit Beauty during the past year. Sisters also purchased beauty supplies from Benefit Beauty. Lastly, Sisters has a non–interest-bearing loan owing to Benefit Beauty, and there are no repayment terms for this loan.

Sisters is looking to expand next year and is seeking a new bank loan. As a result, it has asked Sol Newton, CPA, to audit its financial statements. In a preliminary discussion with management, Sol notes that most sales are on a cash basis, and therefore accounts receivable are not significant.

Sisters holds an inventory of beauty supply products, including hair products and tools. It also has property, plant, and equipment that is being depreciated over the estimated useful lives. The auditor learns Sisters is being sued because one of the stylists at Sisters provided styling services for a wedding party and over-dyed the hair of the entire wedding party, resulting in it cracking off and impossible to put in updos. The lawsuit is for a significant amount as the bride is claiming damages for pain and suffering because she says her wedding and wedding pictures were ruined due to the disastrous styling from Sisters salon. Sisters Inc. prepares its financial statements using ASPE.

a. Discuss the impact these transactions will have on Sol during the risk assessment phase.

b. Discuss the accounting estimates with respect to estimation uncertainty for Sisters Inc. What information should the auditor gather with respect to these estimates?