IndaCar Inc. (IC) operates a high-end car rental agency that specializes in the rental of unique vehicles and is located next to Lester B. Pearson International Airport in Toronto. IC is a private Canadian company that is wholly owned by Jake Bouvier. Daytona Lemans LLP, Chartered Professional Accountants (DL), has reviewed IC’s annual financial statements since IC was founded five years ago and has experienced no significant problems when performing the previous review engagements. You just found out you are the manager on the job for this year. As a result of IC’s success in Toronto, Jake is exploring the possibility of expanding IC’s operations to include the Vancouver and Calgary airports. Jake expects that he will be using IC’s fiscal 2016 financial statements to attract equity investors to partially finance this expansion. To maximize IC’s share value attractiveness to potential investors, Jake is wondering if he should have the fi nancial statements audited. Jake commented that he received a tip from one of the employees at the Pearson location that the manager is stealing cash. He wants to know if the regular audit engagement is likely to identify whether cash is being stolen and what procedures the auditor is likely to perform in this risk area. You have reviewed the fiscal 2015 engagement file in order to familiarize yourself with the client and to review the planning documentation prepared for the previous year’s engagement.

(a) Advise Jake on the costs and benefits of upgrading from a review engagement to an audit engagement. 

(b) In planning the audit, the auditor must consider audit risk. Using the above case facts, make an inherent risk assessment. 

(c) If the auditor decides that control risk is high, what type of audit will DL perform? How will this impact the amount of audit work? 

(d) Calculate and conclude on the most appropriate planning materiality, and include a detailed explanation supporting your decision. 

(e) For the following accounts, what assertions will the auditor be most concerned with? What evidence should the auditor gather to verify the management assertions? 

1. Accounts receivable 

2. Property, plant, and equipment 

3. Accounts payable 

4. Long-term debt 

5. Car rental sales

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IndaCar Inc. As at December 31 (in thousands of dollars) 2016 2015 (unaudited) (reviewed) Assets $ 1,453 Cash 162 Accounts receivable 1,142 130 1,270 1,140 Inventory Prepaid expenses 112 3 3,977 1,435 Property, plant, and equipment (net) 20,657 14,465 Investments 2,000 14,465 22,657 $26,634 $15,900 Liabilities 90 Bank operating loan 100 Accounts payable and accrued liabilities 1,225 166 1,315 266 Long-term debt 1,260 200 2,575 466 Shareholders' Equity Common shares 100 100 23,959 Retained earnings 15,334 24,059 15,434 $26,634 $15,900 EXCERPTS FROM THE INCOME STATEMENT For the years ended December 31 (in thousands of dollars) 2016 2015 (unaudited) (reviewed) Revenues Car rentals $22,710 $14,300 Investment income 6,085 4,485 28,795 18,785 Expenses Vehicle operations, including amortization 10,670 8,870 Rent and administration 995 810 Wages and salaries 7,200 6,675 Total expenses 18,865 16,355 Income before income tax 9,930 2,430 Income tax 1,305 780 Net income $ 8,625 $ 1,650