A&E Landscaping Co. (A&E") is a small high-end landscaping company located in the Town of Skyview, Ontario. The company was established in 2018 by two cousins, Ana and Emma Inkling. The Inkling cousins grew up with a family of farmers and developed a shared passion for gardening and working outdoors. A&E is an incorporated business with 50% shared ownership by each cousin. The company has grown steadily over the past 5 years. With positive growth and expansion, came the requirement of purchasing new equipment. To finance the growth of A&E, Ana and Emma had to work with the bank to get loans to fund these equipment purchases. As a result of these loans, A&E was required to produce annually audited financial statements. A&E prepares its financial statements using ASPE. A&E has two revenue streams-landscaping and snowplowing. They have a loyal and steadily growing client base. Given the relationship that Ana and Emma have with most of their clients, the contract payment terms established for A&E clients are as follows: Landscaping -20% at contract signing, 50% when the job is half-complete, and the balance upon completion. Snow plowing-terms are based on a fixed monthly fee. The amount is negotiated based on the size of the property being plowed. If clients pay upfront for the season, they receive a 5% discount Assets that required a bank loan to finance the purchases were as follows: January 2022-Backhoe: $30,575 January 2021-Excavator: $57,680 January 2018-Skid Steer: $47,650 As the company continues to grow, A&E has had to hire additional full-time staff. They currently have 4 full-time staff, in addition to Ana and Emma Throughout the busier seasons, they hire part-time staff as required. 32 33 In anticipation of being assigned to this engagement, you decided to review the firm's quality assurance manual. There was nothing you noted in there that indicated this engagement might contravene the firm's policies. Client: You always want to be prepared for your engagements so do some research on the companies in advance of your assignments. When researching A&E Landscaping Inc, you discovered that Emma has a brother, Ethan, who is the current mayor of Skyview. You know of Ethan as he has recently been in the news. He is under investigation for misappropriating public funds. The company keeps all their records organized in the office and indicated the auditors are welcome to come out and review any documents necessary. You are a junior auditor and will be performing the engagement with Melvin the Senior Auditor, a CPA who has worked on the engagement last year (the SR is rotated every 2 years) and report to the Partner Lucy who has been the lead partner for the last 5 years. She has indicated to you that there is no need to have a Quality Control reviewer on this file. Objectives Planning the audit involves a number of different procedures that need to be performed. The activities you will perform on your audit of A&E Landscaping Inc are grouped into the following categories: A) Engagement Acceptance/Continuance 1. Obtain an understanding of the business and the audit engagement 2. Determine the audit firm's ability to perform the engagement (including an independence assessment) 3. Identify the risks that exist in the engagement 4. Making a decision and conclude on acceptance of the engagement 5. Obtain an Engagement Letter B) Plan the Audit Engagement 1. Analyze the draft financial statements to identify breas of risk 2. Determine materiality for the engagement 3. Develop the audit strategy/plan (note this will be completed throughout the case exercises as you learn about how to audit each section of the financial statements) Intended Financial Statement Users Identify the users of the financial statements and the factors that would influence their decision making and the impact of qualitative considerations DY b) C G Preliminary Materiality User Basis for Calculation Pre-tax income (normalized) Gross Revenue Assets "Possible benchmarks Pre-tax income 5-10% Revenue Profe Assets 05-2% 0.55% 0.5-1% 17 Performance Materiality-50% of Overall Materiality 29 Conclusion 30 31 Overal Materialty This year Previous Period 9.389 Materiality Assessment Anticipated This Penod Factors Previous Period Performance Materiality This Year Previous penod Year end: 4694 Qualitative Considerations (e. profitability trends, regulations, user expectations etc. Benchmark Possible Materiality