EcoSun Inc. $($ESI$)$ is a medium$-$size company that is developing solar energy systems for private

residences and small businesses. It is privately owned, with the majority of the shares held by the

company$$s president, Shu Mingfei. Started up to years ago, to date, it is mostly involved in

research and development, but this year it completed its first customer sales and installation. Shu

has engaged your firm to do the current year$$s audit because she plans to obtain $$20$ million in

debt financing from outside investors to allow further commercialization of the ESI systems.

You are now reviewing ESI$$s preliminary general ledger trial balance in order to begin preparing

the audit planning. The following is a summary of the accounts that appear in this trial balance as

at year$-$end:

Account Balance DR$/($CR$)$

Cash $ $101,209$

Accounts receivable $85,019$

Allowance for bad debts $(15,000)$

Inventory, finished goods $900,550$

Inventory, work$-$in$-$process $44,666$

Inventory, raw material $67,890$

Deferred development costs $34,445$

Property, plant, and equipment $3,700,990$

Accumulated amortization, PPE $(901,108)$

Patents, at cost $1,010,000$

Accounts payable $(198,009)$

Warranty provision $(30,000)$

Shareholder loan, non$-$interest bearing $(11,000,000)$

Share capital, common shares $(1,000)$

Retained earnings $1,364,767$

Revenue $(812,202)$

Cost of goods sol $666,502$

General and administration expenses $1,002,500$

Research and development expenses $3,990,000$

Other expenses $89,990$

Required:

a$.$ Identify three factors that your firm should consider before agreeing to conduct the audit.

b$.$ What economic and industry risks are affecting this business? How would these risks

affect the company$$s financial statements and your overall audit strategy?

c$.$ State the dollar amount that you would consider an appropriate materiality level for

planning this audit, giving your supporting reasons. Explain why the materiality

judgement is one of the first important decisions your team must make in planning this

audit.

d$.$ List two analytical procedures you could perform using the trial balance data above $($you

are not required to calculate any ratios$).$ Explain what each procedure can tell you about

the risks in ESI$$s financial statements. Give one example of additional information you

would want to obtain to perform analytical procedures in this audit, and a reason that it

would be useful.

e$.$ After completing Required A to D you learn the following: ESI had a previous auditor in

the prior year and are looking for a new auditor, as they disagree with their previous

auditor about their revenue recognition policy. ESI indicated their previous auditor was

too conservative. The director of Marketing of ESI, Tracey, suggested your firm because

she heard good things about it and her cousin is a staff accountant for your firm. Discuss

this new information in your consideration to accept this engagement.

Evaluation Rubric

Component Marks

Three audit acceptance factors with explanations $6$

Economic and Industry risks re: financial statements and overall strategy $6$

Materiality $($calculation$,$ justification, and discussion on its use for planning$)10$

Two Analytical procedures and request for information $4$

Client acceptance new information $4$

Total $30$