ABCD produces robotic parts for the food manufacturing industry. It is a private company, owned by two equal shareholders: Imaan and Sofia. They started the company in 2015 and were initially quite successful. The robotics parts are challenging to develop and if manufactured improperly, due to the nature of the use (food manufacturing), could result in significant liability if the parts manufactured by the company are found to be the cause of food contamination.In fact, one of their major customers is currently investigating the cause of contamination in one of their food production facilities. It is unknown whether there will be liability related to ABCD as a result of the investigation.

In recent years, the business has had it's struggles.There is more competition and they are finding it more difficult to retain key staff.Imaan and Sofia are finding themselves more involved in the business over the 18 months. They are now directly performing accounting and finance functions as most of the turnover has been within the accounting team.

They have made the difficult decision to sell the business this year, especially before either the potential liability becomes reality.They have an interested buyer. Audited financial statements are a requirement of the loan agreement for the buyer.

Your audit firm has been appointed the new auditor this year. Robotics is a specialized field and your firm is excited to work with a new type of company despite not having any IT or engineering specialists in the firm. The previous auditor was a small local firm and the owner retired last year after a disciplinary hearing regarding inapproriate professional behaviour unsuitable for CPAs. The following are the figures from the client's financial statements for the current and previous year:

Current YearPrevious YearSales$ 1,481,984$ 2,469,974Cost of sales711,3531,259,687Gross Margin770,6311,210,287Operating Expenses565,643915,203Net Income204,988295,084

Partial Balance Sheet:

Current YearPrevious YearCash$207$145,768Receivables123,499411,662Inventories47,424104,974Prepaid Expenses2,50055,678Property Plant and Equipment1,111,7391,445,260Total Assets$1,285,369$2,163,342

Required:

PART A: Materiality - This part is worth 6 marks

1. Who are the users that should be considered when determining materiality and what are their needs? (2 marks)

2. Which of the following base (benchmark) of materiality would you use and why? (2 marks - be sure to consider both quantitative and qualitative factors)

• Current Year Assets
• Current Year Net Income
• Current Year Sales
• Previous Year Sales
• Previous Year Net Income
• An average of assets and sales

3. Calculate materiality based on your response to question 2 and show your work. (2 marks)

PART B: Client Acceptance (continued numbering of bullet list above) - This part is worth 8 marks

4. Assume ABCD has not yet been accepted as a client. What are some factors you should consider relevant to this case prior to doing so (state and explain three). To be awarded marks youmust relate it to the case facts. (6 marks - 2 for each factor)

5. If your firm decides to accept the client, what issue arises that could violate the CPAs code of conduct and auditing standards? How can it be addressed? (2 marks)

PART C: Risk Assessment (continued numbering of bullet list above) - This part is worth 6 marks

6. State two inherent risks of ABCD Company you would include when calculating audit risk. Write the risks out fully (EXAMPLE: There is a risk that________ due to ______________ which could result in _______________). (2 marks each - total of 4 marks)

7. If control risk is set at high, what will detection risk need to be set at? What does the detection risk level you identified mean for the audit? (2 marks)