Describe four industry and environmental factors that increase MCI's business risk. Explain why the factor increases business risk. Link the business risk factors you identified to specific risks of material misstatements (RMM). Use the table on the following 2 pages to complete your answer

Auditing -CACC 521 Assignment #1- Due Week 5- Monday October 16, 2017 50 marks Question 1 (15 marks) Daniel Charon is the loan officer of the Georgian Bay Bank, which has a loan of $540 000 outstanding from Regional Delivery Service Ltd., a company specializing in the delivery of products of all types on behalf of smaller companies. Georgian Bay's collateral on the loan consists of 20 small delivery trucks with an average original cost of $45,000. Charon is concerned about the collectability of the outstanding loan and whether the trucks still exist. He therefore engages public accountant Susan Virms to count the trucks, using registration information held by Charon. Virms is engaged because she spends most of her time auditing used automobile and truck dealerships and has extensive specialized knowledge about used trucks. Charon requests that Virms issue a report stating: Which of the 20 trucks are parked in Regional's parking lot on the night of June 30; The condition of each truck, using the categories poor, good, and excellent; and The fair market value of each truck using the current \"blue book\" for trucks, which states the approximate wholesale prices of all used truck models based on the poor, good and excellent categories. REQUIRED a) Identify which aspects of this narrative fit each of the following parts of the definition of auditing: (1) Information or Assertion. (1 mark) (2) Established criteria. (3 marks) (3) Accumulates and evaluates evidence. (4 marks) (4) Competent, independent person. (2 marks) (5) Report of results. (3 marks) - b) Identify the greatest difficulties Virms is likely to face doing this assurance engagement. (2 marks) - Question 2 (9 marks) You CPA, work for a large public accounting firm, Jason Siegal LLP (JS), with many offices across the country. As part of your new job as a senior manager in the national office, you have been assigned to do a quality control review of the Highland Organic Foods (HOF) audit recently conducted by your Halifax office. HOF is a wholesaler of organic food products. Your firm has been auditing HOF for the past six years ago. Your firm issued an unqualified audit opinion on the December 31, 2016 financial statements. The following are your notes from the review of HOF's December 31, 2016 year-end audit file: The audit team was led by Leonard Fink, who obtained his CPA, CA designation in 2014 while working at a small firm. Leonard left the accounting firm in January 2015 and joined HOF as the controller. After about a year Leonard realized that he really missed public 1 accounting and in May 2016 quit HOF and joined JS. The HOF audit partner, Jim Hook, personally selected Leonard to lead the HOF audit. Jim thought that Leonard's extensive understanding of the organic food business and his extensive knowledge of HOF's internal controls would be a great value in the conduct of the audit. Leonard had the help of two assistants, Joe Spine and Marshia Devine . Leonard thought that on-the-job training was one of the best forms of professional development. He decided to let Joe and Marshia perform all of the audit field work and resolve all audit issues. He would not provide any direction to them until the audit was completed, at which time he planned on reviewing the file and providing his feedback. He was confident that they were ready to take this step in their professional development as they were considered very bright and had both done well in their auditing courses at university. The current year's audit working paper files were well organized. However, in November 2016, JS's main server crashed and the previous years' soft copy working papers and the soft copy permanent file were lost. JS's IT department were still working on the recovery of the files at the time of the audit. The files were never recovered. After much searching, Marshia found the hard copy HOF 2016 audit file. The hard copy file that she retrieved only included specific documents that were required to be kept in hard copy form (ie. signed engagement letter, signed accounts receivable confirmations). Since the prior years audit files could not be located, Marshia asked Susan Bam, HOF's assistant controller, for information on the prior year's audits. Susan indicated that the HOF audit has never had any significant problems. Susan explained that as a result of internal control weaknesses, JS did not rely on controls. She also, indicated that in last year the audit assistant told her materiality was $50,000. Marshia concluded that since there had not been any changes to HOFs operations in the current year it was appropriate to use the same materiality level and audit approach from previous years. Marshia decided not to perform any procedures on internal controls since they were weak and she had no intention of relying on them. During late 2015, HOF suffered a significant drop in sales due to a recall of organic spinach and strawberries that were tainted by the e-coli. Given HOF's drop in sales, the audit partner gave HOF a 20% reduction in its audit fees for 2016. Required:Evaluate the quality of the HOF audit engagement by identifying any deficiencies in the application of generally accepted auditing standards (as set out in CAS 200) for the conduct of the December 31, 2016 financial statement audit. For each of the deficiencies, identify which standard that was violated and explain. 2 Generally Accepted Auditing Standard ( mark each) Assessment of the audit engagement. Note all deficiencies mark each) 3 Generally Accepted Auditing Standard ( mark each) Assessment of the audit engagement. Note all deficiencies mark each) Question 3 (7 marks) Rossi, a public accountant, audited the financial statements of Newfoundland Rugs Ltd. Cooke, the president of Newfoundland Rugs, told Rossi that the company was planning a private placement of company bonds to raise $500000 of needed capital. The audit proceeded smoothly, and the audited financial statements were issued. Rossi completed their audit by following generally accepted auditing procedures. Unknown to Rossi, several significant receivables represented consignment accounts and not receivables, but Cooke had persuaded the companies involved to sign the receivable confirmations Rossi had sent out, indicating they agreed that they owed the balances reported at the balance sheet date. In addition, a large number of rolls of low-quality interior carpeting had been classed as first quality. The effect of these two fraudulent acts resulted in a profit of $150 000 (instead of a loss of $480 000) and a positive net worth (instead of a negative net worth). Newfoundland Rugs borrowed the money on the private placement and then went bankrupt several months later. 4 Required. a) Would the private-placement lenders likely succeed in a suit against Rossi? If so, what must they prove? b) What defence would Rossi use? Question 4 (19 marks) My Chatr Inc. (MCI) is a medium sized private company in the business of developing, manufacturing and distributing wireless Internet devices. These devices permit users to browse the Internet and to send and receive e-mail while mobile. MCI's niche is in commercial Internet devices, which are more durable than retail consumer versions. MCI's special keyboard, the most advanced in the industry, is very small, easy to use and durable. According to a leading market research firm, the market for this segment is growing at 70% per annum. Competition in this segment is fierce. MCI operates in an industry characterized by heavy expenditures in research and development and products that are regularly updated and revised. Recent innovations by one of MCI's rivals suggest that the industry is in a period of intense competition. Most of MCI's production is exported. The company was founded by Linda Scott, CPA, CA and was incorporated in March 2005. MCI obtained a $5 million bank loan that was personally guaranteed by Scott. According to the loan agreement MCI must maintain a current ratio of 2:1 at all times otherwise the loan becomes payable. The company has a December 31 year end. Cotton & King LLP (C&K), a large public accounting firm, had been the auditors since 2005. In November 2015 MCI decided to hire your accounting firm, Lewis and Frydman LLP (L&F) to undertake its audit for the year ended December 31, 2016 based on the fact your firm's audit fee was the lowest compared to all other firms who submitted a bid to do the audit. MCI operates out of a single location in Canada and has 72 employees. The company has grown rapidly with annual revenue growth of approximately 40%. This was less than the forecasted 80% annual growth. Shares of high technology companies have taken a major plunge over the last year. On the positive side, the tremendous shortage of high tech employees, which had hurt MCI, has eased due to widespread layoffs in the industry and the downturn in the economy. Cash flow has been tight recently, and in a number of cases MCA has not been able to pay suppliers on time. Management is looking at various options of obtaining additional financing over the next year. One of the considerations is to go public and to issue an initial public offering. Management is aware that if the company goes public that governance will be more important than it is now. You are a recently qualified CPA,CA with L&F and have been assigned to the audit team for the audit of MCI's financial statements for the year ending December 31, 2016. It is now February 10, 2017 and you have been assigned to start the planning for the year-end audit. In preparation for the audit planning you obtained the following information: MCI's key financial information for the past two years was: Revenues (thousands) 2016 2015 19,061 14,044 5 Net loss before taxes Total assets 1,800 230 15,631 8,908 During March 2016, Scott authorized a change in credit policies. Previously, customers were granted credit based upon the credit ratings developed by MCI's credit manager, which took into account the outstanding balance of the customer's account and an analysis of its financial condition. Due to the recent downturn in the economy Scott decided that MCI must use a more lenient credit policy to keep sales flowing. Accordingly, as a cost cutting measure, the credit manager was laid off in February 2016. Scott now evaluates each customer contract or purchase order individually to determine whether credit should be granted. As a result of this new policy, no customer orders were declined for poor credit since February 2016. In August 2016, the company was sued by a supplier in California for breach of contract related to the cancellation by MCI of a firm order for software. MCI's U.S. lawyers have said that they can probably drag out the case until at least March 2017. The order was for $1,280,000 and this is the amount of the claim. Scott believes the company should be able to settle for about half of that amount although if they did lose the lawsuit and were required to pay $1,280,000 they might have difficulty to come up with the funds. Required a) Describe four industry and environmental factors that increase MCI's business risk. Explain why the factor increases business risk. Link the business risk factors you identified to specific risks of material misstatements (RMM). Use the table on the following 2 pages to complete your answer. (8 marks) Describe industry and environmental factors that increase MCI's business risk. Explain why the factor increases business risk (1 mark). 1. Link to Risk of Material Misstatement (1 mark) 2. 6 Identify industry and environmental factors that increase MCI's business risk. Explain why the factor increases business risk (1 mark). 3. Link to Risk of Material Misstatement (1 mark) 4. 7 b) Determine the acceptable audit risk for the MCI engagement (ensure to indicate whether it is high, moderate or low and provide your support rationale/support) ( 5 marks) c) State the dollar amounts you would consider to be an appropriate planning and performance materiality level for the 2016 MCI financial statement audit. Justify your recommendation with supporting reasons. Be sure to consider both quantitative and qualitative factors (6 marks) 8