a. Analysis and evaluation: Evaluate the impacts the costing errors and inventory cutoff errors have on the audit and the assessments of control risk, fraud risk, and materiality. Does your evaluation change depending on whether the errors are material or immaterial?

b. Evaluation and conclusions: Refer to C3.4 in Chapter 3 in which you calculated planning materiality for MSI based on results from the first two quarters and estimates for the last two quarters. Now that you have the results of all four quarters (see table above), evaluate your calculation of planning materiality from C3.4. Would you have adjusted your planning materiality during the year-end fieldwork based on the actual results from the third and fourth quarters? If so, what would be the adjusted amount? What effect, if any, would your adjustment have on your planned audit procedures for year-end fieldwork?

Mobile Security, Inc. (MSI) has been an audit client of Leo & Lee, LLP for the past 12 years. MSI is a small, publicly traded aviation company based in Cleveland, Ohio, where it manufactures high-tech unmanned aerial vehicles (UAV), also known as drones, and other surveillance and security equipment. MSI?s products are primarily used by the military and scientific research institutions, but there is growing demand for UAVs for commercial and recreational use. MSI must go through an extensive bidding process for large government contracts. Because of the sensitive nature of government contracts and military product designs, both the facilities and records of MSI must be highly secured.

The auditors are nearing the final wrap-up stages of the audit for the year ended June 30, 2023. The following table shows final financial information for all four quarters of fiscal year end June 30, 2023 (amounts in millions).

In October 2022, MSI installed a new cloud-based inventory costing system. During interim work, the audit team found some errors with the costing calculations in the new system, which led to errors in recommended sales prices used in MSI?s competitive bidding process. There were also problems with proper inventory cutoff at year-end. Some raw materials that were in transit were not recorded in inventory when they should have been. The audit team has a meeting scheduled for the afternoon to discuss the findings and next steps to wrap up the engagement.

For the past five years, the engagement quality control reviewer was Sally Pickering, a partner with Leo & Lee. Sally retired three months ago. For the past month, the firm has been considering who would take Sally?s place as the engagement quality control reviewer for the MSI audit. The industry and operations of MSI are very specialized. Unfortunately, no other partner in the firm, other than the engagement partner on the audit team, has experience in the industry or with MSI.

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2nd Quarter 3rd Quarter 4th Quarter 1st Quarter Item Total assets Total revenues Pretax income $96.00 33.00 3.20 $92.00 31.00 2.79 $93.00 $89.00 22.00 28.00 2.24 1.57