Alice Chen is a manager of KK CPA firm. She is in the engagement team for the audit of Moji Enterprises. Moji was founded by Mr. Liu in early 2000. It manufactures steel subparts and sells to automobile manufacturers. It was successfully listed on the Growth Enterprises Board of Shenzhen Stock Exchange in 2011.Mr. Liu is the CEO as well as the chairman of the board of directors.

Alice is planning the 2015 audit and is considering a preliminary judgement of materiality, the performance materiality, and the appropriate inherent risks. The unaudited financial statement information is provided in the Appendix (an excel file is also provided for ease of calculation). Additional relevant information is summarized below.

1. KK CPA has been the audit firm for Moji since its IPO and they keep a good relationship. Mr. Liu and the management, as well as people in the accounting department have always been cooperative, honest, and positive about the audit and financial reporting. No material misstatements were found in the prior year's audit. Since Mr. Liu had been through bankruptcy at an earlier time in his career, KK CPA firm has kept monitoring the relationship carefully.

2. Internal controls for Moji are evaluated as reasonably effective for all cycles. During the past audit experience with Moji, Alice made some recommendations to improve its internal audit function. But she observed no changes until the current year's audit.

3. Mr. Liu is very self-confident with a somewhat controlling personality. The members on the strategy committee include Mr. Liu as well as two independent directors, one is an accounting professor and the other one is an attorney. Most of the strategic decisions are made by Mr. Liu because he believes that it is his job to make all the tough decisions. He delegates responsibility to others but is not always willing to delegate a commensurate amount of authority.

4. In early 2015, Mr. Liu decided to acquire a high-tech company. The company produces intelligent devices that are installed in high-end cars. Alice noticed that the company was founded by Mr. Liu's son in law.

5. Given an increasing demand for personal cars, the industry has enjoyed favorable growth in the past few years and the trend is continuing in the current year. Industry profits are reasonably favorable, and there are no competitive or other apparent threats on the horizon. In early 2015, he set a target that Moji should become one of the Top 3 in the industry in terms of market share.

6. To support for an expansion in production, Moji obtained a bank loan at the beginning of the year, amounted $300,000. It also sold more shares to some selected shareholders.

Required: a. Make a preliminary judgment of materiality and determine the performance materiality to financial statement accounts. Provide explanations.

b. Assess acceptable audit risk (AAR) for the current year as high, medium, or low. Provide explanations.

c. Explain the purposes of performing analytical procedures during an audit. Perform analytical procedures for Moji Enterprises. Based on the results of AP, identify three accounts that may require additional evidence in the current year's audit.

d. Based on your answer in parts a-c, complete the evidence planning worksheet (as below) to decide tests of details of balances for one of the accounts you analyzed in part c. Focus on the three rows only: Acceptable audit risk (AAR), Inherent risk (IR), and Analytical procedures (AP). Also fill in performance materiality at the bottom of the worksheet. Supplement any explanations that are not mentioned in parts a-c (Hint: fill in the audit objectives).

Balance Sheet for Moji In thousand RMB Unaudited Audited Unaudited Audited 2015/12/31 2014/12/31 2015/12/31 2014/12/31 Cash 487,378 267,962 Accounts payable 4,283,104 Accounts receivable 5,053,578 7,088,018 4,449,842 Allowance for uncollectible acco Nots payable 300,000 0 -240,000 -430,000 Accrued liabilities 1,447,200 1,196,040 Inventories 9,041,804 7,776,800 Deferred tax liabilities 2,400,000 3,518,000 Prepaid expenses 59,000 49,400 Current portion of long-term debt 480,000 480,000 Total current assets 16,436,200 12,114,004 Total current liabilities 8,910,304 10,247,618 PPE Long-term debt 1,920,000 2,400,000 As cost 25,890,510 19,845,068 Less: accumulated depreciation 8,765,980 7,551,822 Net: PPE Shareholders' equity 17,124,530 12,293,246 Common stock 2,500,000 Goodwill 2,000,000 2,400,000 690,000 Additional paid-in capital 4,939,842 2,667,602 Total assets 35,960,730 25,097,250 Retained earnings 17,690,584 7,782,030 Total shareholders' equity 25,130,426 12,449,632 Total liabilities and shareholders' e 35,960,730 25,097,250