AutoSmart Corp AutoSmart is a public company founded in 2004 to manufacture and sell specialty auto products mainly relating to paint protection and rustproofing. By 2013, the AutoSmart board of directors felt that the company's products had fully matured and that it needed to diversify. AutoSmart aggressively sought out new products, and in March 2014 it acquired the formula and patent for a specialized motor lubricant (Smooth-Run) from SIM, LLC. In addition, the company purchased 15 percent of SIM's outstanding common stock. At the time of the stock purchase, Steve Matthews owned 100 percent of SIM; he retained ownership of 85 percent of percent purchase. In December 2014, the board of directors appointed Mr. Matthews to be president of AutoSmart. Smooth-Run is unlike conventional motor lubricants. Its innovative molecular structure accounts for what management believes is its superior performance. Although it is more expensive to produce and has a higher selling price than its conventional competitors, management believes that it will reduce maintenance costs and extend the life of equipment in which it is used AutoSmart's main competitor is a very successful multinational conglomerate that has excellent customer recognition of its products and a large distribution network. To create a market niche for Smooth-Run, AutoSmart's management is targeting commercial businesses in western states that service vehicle fleets and industrial equipment. AutoSmart's existing facilities were not adequate to produce Smooth-Run in commercial quantities. In June 2015 AutoSmart commenced construction of a new plant in Nevada. After lengthy negotiation, it received a S900,000 grant from the state government. The terms of the grant require AutoSmart to maintain certain employment levels in Nevada over the next three years or the grant must be repaid. The new facilities became operational on December 1, 2015. AutoSmart financed its recent expansion with a term bank loan. Management is considering issuing additional stock later in 2016 to address the SIM after AutoSmart's 15 mpany's cash flow problems AutoSmart's auditors resigned in February 2016, after which AutoSmart's auditors resigned in February 2016, after which Steve Matthews contacted your firm. The previous au informed Mr. Matthews that they disagreed with AutoSmart's valuation of deferred development costs for Smooth-Run. It is now April 20, 2016, and you and a partner in your firm have just met with Steve Matthews to discuss the services your firm can provide to AutoSmart for the year ending March 31, 2016 During your meeting, you collected the following information: ditors AutoSmart incurred substantial losses during each of the past three fiscal years. There have been no significant orders of Smooth-Run received to date AutoSmart has commenced a lawsuit against a major competitor for patent infringement and industrial espionage. Management has evidence that it believes will result in a successful action and wishes to record the estimated gain on settlement of S4 million. Although no court date has been set, legal correspondence shows that the competitor intends "to fight this action to the highest court in the land." Deferred development costs of $2 million represent material, labor, and subcontract costs incurred during 2014 and 2015 to evaluate the Smooth-Run product an AutoSmart has not taken any amortization to date but thinks that a period of 20 years would be appropriate d prepare it for market. Royalties of $0.25 per liter of Smooth-Run produced are to be paid annually to SIM The $3.514 million term bank loan is secured by a floating charge over all corporate assets. The loan agreement requires AutoSmart to undergo an annual environmental assessment of its old and new blending facilities. As you return to the office, the partner tells you that he is interested in having AutoSmart as an audit client. She wants you to provide a detailed list covering the audit and business risks you foresee arising from this potential engagement. HINT: To help find the audit and business risks, go line by line through the case