Tom’s Trailers Ltd. (TTL), located in London, Ontario, manufactures industrial trailers that are used to ship goods across the country. Originally, Tom Tran owned 60 percent of the common shares of TTL and the other 40 percent was owned equally by Tom’s four brothers. Tom’s brothers have always been happy with their investment in TTL as they have always received a healthy dividend from TTL at the end of each fiscal year. In a strategic decision last year, Tom sold 9 percent of his shares to Junior Strategic Investments Ltd., a venture capital firm, in exchange for a $30-million investment. This investment has been used to fund the purchase of a new production plant in Burnaby, BC, and to fund the research and development of new technologies that would allow TTL to produce better trailers that would hold more. The terms of the agreement with Junior Strategic Investments require TTL to provide audited financial statements 60 days after its December 31 year end. The following is select information from the financial statements:

Shane and Wayne Co. has been TTL’s accounting firm since its inception; however, it has always performed a review engagement. Based on past engagements, Shane and Wayne is aware that, overall, the controls seem strong at TTL, as there is a formal code of conduct, and there appear to be established lines of authority. However, this year Tom has indicated that he is concerned about the gross margin at the new Burnaby plant. It is much lower than the gross margin at the London plant. The production manager at the Burnaby location is blaming the higher costs on the start-up of the plant. TTL has a large number of foreign sales and Shane and Wayne noted in previous review engagements that several accounting adjustments were required due to foreign exchange translation errors. In discussions with the client, they also determined that TTL had implemented a new IT system.

Shane and Wayne is starting its audit planning for the upcoming year. The firm uses the C-PEM and follows the C-PEM guidelines for materiality. The firm assesses performance materiality at 65 percent of planning materiality.

Required

a. Discuss the risk of material misstatement and conclude on the detection risk.

b. Assess planning materiality.

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Dec. 31, 2020 ('000s) Dec. 31, 2019 (O00s) Total assets $ 34,268 $ 46,601 Total revenues 109,059 160,100 Gross profit 19,306 30,681 Earnings before tax 2,316 19,212 Earnings after tax 1,613 15,361