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Case: Today is October 2 0 th , 2 0 2 3 , You, CPA, are an audit manager at Hunter & Smith LLP (
Case:
Today is October th You, CPA, are an audit manager at Hunter & Smith LLP H&S H&S has been engaged by the board of directors to audit the financial statements of Blackstone Incorporated Blackstone for the year ending December H&S has maintained a strong relationship with Blackstone, usually completing the audit by March st each year. During the fiscal year under audit, there have been no significant audit issues that would impact the financial statement users which include the owners of Blackstone along with their lenders. However, H&S has become aware of a newly imposed bank covenant which requires Blackstone to maintain a current ratio of :
Today, you have met with the engagement partner to discuss the audit. The engagement partner recently had a meeting with Blackstones CFO, Sarah Allan, who indicated that Blackstone is planning an IPO for fiscal Sarah also noted that the draft financial statements have been prepared under International Financial Reporting Standards IFRS
During your meeting the engagement partner says to you, Sarah expressed concern about the financial controllers sudden departure shortly after the IFRS adjustments were completed. Please keep this confidential as Sarah was quite sensitive to this information. This does cause quite a bit of concern, however, due to both Sarah and the executive teams long tenure at Blackstone I know they are well versed in this industry and have the appropriate expertise and knowledge.
With the sudden change of a possible Initial Public Offering IPO we will need to quickly draft an audit plan for my review. This audit plan should include a discussion regarding key audit risks as well as our approach for the audit which will either be substantive or combined. Please ensure that you state the overall audit risk of the file by considering any inherent risks, control risks and detection risks. When discussing your audit approach please ensure you have strong documentation supporting your approach. I will also need you to consider materiality and performance materiality for the audit. Please include a discussion on the users to corroborate how you determined your selected base for materiality.
Within your audit plan, please also include planned audit procedures that you will perform over key financial statement accounts. I am looking for you to include a discussion on what you believe the risk for that account will be along with the assertion and specific audit procedure. We should also complete an analytical review of some of the major income statement fluctuations in the current year and assess some key financial ratios compared to prior year. For your financial ratio analysis please consider ratios calculated based on the balance sheet and income statement.
Lastly please also prepare a quick memo describing our responsibilities as auditors related to the IPO and the prospectus.
You left your meeting with your engagement partner feeling slightly overwhelmed but ready to complete his requested tasks. After your meeting with the engagement partner. You gave Sarah Allan a call and decided to schedule an in person meeting with Sarah at Blackstones head office. You plan to take notes during your meeting to Sarah to review after. Please refer to Appendix I for your notes.
Appendix I Notes
Blackstone Incorporated Blackstone is a private company that focuses on manufacturing product. Management is aware that there has been significant demand for their products therefore to further meet customer demand the Board of Directors along with Management have decided to pursue an IPO. An underwriting firm has agreed to complete the IPO for December st
Sarah has provided current year financial results as of September th along with prioryear comparative figures which have been prepared under IFRS in anticipation for the IPO. Sarah mentioned that Blackstone has been without a financial controller since October nd and that she has been relying on the finance and administration team to take on additional tasks to ensure a successful IPO and prepare for the December st audit.
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