As part of the audit engagement for Quality Education, you have been assigned to prepare an audit memo addressing the following areas: a) Overview of Company: Provide a general overview of Quality Education. b) Overview of Industry: Please provide a general overview of the industry Quality Education operates in. c) Financial Health: Please provide a general description of the financial health of Quality Education. d) Inherent Risks: Please identify 3 inherent risks of Quality Education and explain WHY these are risks. e) Audit Approach: Please discuss the suggested approach for the quality Education audit (Substantive, combined approach, controls approach). f) Materiality: Discuss who are the financial statement users and calculate an appropriate materiality and performance materiality. Conclude on which materiality base is the most appropriate and why other bases would not be as appropriate. g) Procedures (Financial Statement Level): Procedures and Financial Statement Level Risks: Identify what you believe the three riskiest financial statement line items are from an audit point of view. For each risk determine which assertions have the highest risk associated with them. Please provide a detailed audit procedure for each of the three risks.

Quality Education Quality Education was founded in 2005 by a group of passionate educators with a vision to provide high-quality textbooks to students across the globe. Starting as a small operation in a garage, the company gradually expanded its operations and product offerings over the years. In its early years, Quality Education focused on developing textbooks for a specific academic discipline and quickly gained a reputation for producing innovative and comprehensive educational materials. With a commitment to excellence and a customer-centric approach, the company successfully established partnerships with educational institutions and distributors, which contributed to its steady growth. By 2010, Quality Education had established itself as a leading player in the educational publishing industry. The company's dedication to research and development allowed them to adapt to evolving educational trends and integrate technology into their textbooks. This strategic move not only enhanced the learning experience for students but also solidified the company's position in the market. Building on its success, Quality Education expanded its product range to cover a a broader range of subjects, catering to students at various educational levels. The company invested in cutting-edge printing technology and employed a team of talented designers and content creators to ensure the production of visually appealing and engaging textbooks. As the company continued to flourish, it recognized the need to diversify its revenue streams. In addition to physical textbooks, Quality Education ventured into digital publishing, developing interactive e-books and online learning platforms. This move allowed the company to tap into the growing demand for digital educational resources and reach a wider audience. In 2022, Quality Education embarked on a significant expansion initiative to capitalize on its growing success and meet the increasing demand for its products. As part of this expansion, on December 1, 2022, the company launched a one-year subscription to their test bank, providing students and educators with access to a comprehensive collection of practice questions and assessment materials. The introduction of the test bank subscription proved to be a significant milestone for Quality Education, resulting in a substantial increase in revenue. The test bank subscription was well-received by educational institutions and individual customers alike, as it offered a valuable resource for exam preparation and curriculum assessment.

3 5120 Fall 23 Assurance Day 1 However, despite the success of the test bank subscription, Quality Education faced challenges during this period. The expansion costs, coupled with the emergence of a new major competitor in the market, led to increased operating expenses and a decrease in demand for their traditional textbook offerings. These factors contributed to a decline in the company's financial performance, resulting in a net loss for the year. Nevertheless, Quality Education remains committed to its mission of providing high- quality educational resources. The company continues to adapt to changing market dynamics, focusing on cost management strategies, and investing in research and development efforts to enhance its product offerings. With the successful launch of the test bank subscription, Quality Education aims to diversify its revenue streams and position itself as a leading provider of comprehensive educational solutions for students and educators worldwide.

4 5120 Fall 23 Assurance Day 1 Appendix A Notes from meeting with CFO, Naya Numbers Interviewee: Naya Numbers, CFO of Quality Education Date: January 15, 2023 During a recent interview with the CFO of Quality Education, Naya Numbers, it became apparent that there are underlying concerns regarding an upcoming meeting with the company's bank. Naya Numbers expressed their nervousness about the meeting and the challenges the company faces in meeting its debt repayment obligations. Naya Numbers acknowledged that the significant increase in revenue in 2022, largely attributed to the successful launch of the test bank subscription, would positively impact the upcoming meeting with the bank. The increased revenue would provide some reassurance to the bank regarding Quality Education's financial position. However, one major concern highlighted by the CFO is the potential impact of rising interest rates. With the scheduled debt repayment on December 31, 2024, Naya Numbers expressed worry about the company's ability to meet the financial obligations if interest rates were to increase significantly. The CFO recognized the importance of carefully monitoring the interest rate environment and developing strategies to mitigate the associated risks. To address these concerns, Quality Education's finance team is actively working on analyzing various scenarios and contingency plans. They are exploring options to optimize the company's debt structure and are considering potential refinancing opportunities to mitigate the impact of rising interest rates. Naya Numbers emphasized the need for careful financial planning and close collaboration with the bank to ensure a favorable outcome. After all, Quality Education is a public company and the shareholders are expecting success and growth. Furthermore, the majority of Quality Educations senior management team has stock options and they too need the company to succeed in the long term. While the CFO remains apprehensive about the upcoming meeting with the bank, they expressed confidence in Quality Education's overall financial performance, including the company's ability to generate sustainable revenue and maintain a strong market presence. They highlighted the company's dedication to innovation and adaptability as key strengths that would support Quality Education in navigating the challenges ahead.

5 5120 Fall 23 Assurance Day 1 Appendix B To: Quality Education Audit Team From: Vera Fied, Audit Partner Date: March 1, 2023 Subject: Second-Year Audit of Quality Education I would like to provide you with some important information regarding the upcoming second-year audit of Quality Education. As the audit partner leading this engagement, it is crucial that we are aware of certain key details that may impact our approach and understanding of the client. Previous Year's Audit: The previous year's audit of Quality Education was conducted by a team of three accountants who are no longer with our firm. You know who they are and we will not speak of the events that led to their departure. Therefore, as we begin this second-year audit, it is essential that we carefully review the prior year's audit documentation to ensure continuity and familiarity with the client's financial statements and internal controls. CFO Qualifications: The CFO of Quality Education, Naya Numbers, does not hold a CPA designation. However, it is important to note that Naya Numbers has a master's degree in finance, which brings a strong financial background and expertise to their role. While they may have a different skill set compared to a traditional CPA, their knowledge and experience will be valuable as we navigate the audit process. Tenure of CFO: Naya Numbers has been serving as the CFO of Quality Education for two years. Their familiarity with the company's financial operations and internal processes will be advantageous during our audit. However, given their relatively short tenure, it is crucial that we maintain open lines of communication and establish a strong working relationship to ensure accurate and reliable financial reporting. Please ensure that all team members are fully briefed on the aforementioned details and any other relevant information obtained during the planning phase. If you have any questions or require additional guidance, please do not hesitate to reach out to me. Let us work together to perform an effective and thorough audit for Quality Education. Best regards, Vera

6 5120 Fall 23 Assurance Day 1 Quality Education Income Statement For the Years Ended December 31, 2021, and 2022 2021 2022 Revenue $3,500,000 $4,200,000 Cost of Goods Sold ($2,200,000) ($2,800,000) Gross Profit $1,300,000 $1,400,000 Operating Expenses: Selling Expenses ($400,000) ($450,000) General and Administrative Expenses ($500,000) ($550,000) Research and Development Expenses ($150,000) ($180,000) Total Operating Expenses ($1,050,000) ($1,180,000) Operating Income $250,000 $220,000 Interest Expense ($50,000) ($60,000) Other Income $30,000 $40,000 Income Before Taxes $230,000 $200,000 Income Tax Expense ($70,000) ($60,000) Net Income $160,000 $140,000

7 5120 Fall 23 Assurance Day 1 Quality Education Balance Sheet As of December 31, 2021, and 2022 2021 2022 Assets Current Assets Cash and Cash Equivalents $300,000 $400,000 Accounts Receivable $600,000 $700,000 Inventory $800,000 $900,000 Prepaid Expenses $ 50,000 $ 60,000 Total Current Assets $1,750,000 $2,060,000 Property, Plant, and Equipment $900,000 $1,000,000 Accumulated Depreciation ($200,000) ($250,000) Net Property, Plant, and Equipment $700,000 $750,000 Intangible Assets $300,000 $280,000 Total Assets $2,750,000 $3,090,000 Liabilities and Shareholders' Equity Current Liabilities: Accounts Payable $400,000 $500,000 Short-term Debt $150,000 $180,000 Accrued Expenses $100,000 $120,000 Total Current Liabilities $650,000 $800,000 Long-term Debt $500,000 $600,000 Total Liabilities $1,150,000 $1,400,000 Shareholders' Equity Common Stock $500,000 $500,000 Retained Earnings $1,100,000 $1,190,000 Total Shareholders' Equity $1,600,000 $1,690,000 Total Liabilities and Shareholders' Equity $2,750,000 $3,090,000