Engagement Overview Keystone Inc., a listed company on a U$.$S$.$ stock exchange $($publicly traded$)$ in the United States, is looking to expand. XBroker was seen as a potential target. In $2015,$ Ron Smith started XBroker in Columbia, Maryland, for trading equities, options, and derivatives on the financial markets. He borrowed from the bank to start a company, using his house as security. Over the years, he worked very hard to establish a profitable niche in the highly competitive trading market. In February $2023,$ Ron received a call from Linda Alvarez, the senior vice president of Keystone. Linda expressed an interest in buying XBroker. Linda has asked XBroker for its audited financial statements. XBroker came to an arrangement with Keystone to sell the company to Keystone in $2024.$ Your accounting firm, Penmen Associates, will be conducting the audit of Keystone. The partner responsible for the audit is Jo Wadley with team members Alice Cooper $($audit manager$)$ and Sally Brown $($audit senior$)$ to assist. Penmen Associates discussed its own independence to confirm that there are no independence problems associated with either its investments or relationship with Keystone or the investments or relationships associated with immediate family members or close relatives. At the first planning meeting, Jo$,$ Alice, and Sally focused on the risk assessment phase for the new audit, the audit team needs to gain an understanding of Keystone$$s structure and its business environment, determine materiality, and assess the risk of material misstatement. Once the initial high level risk assessment is complete, Penmen Associates needs to have an audit program it can use for the Keystone audit to address how risks are mitigated and to ensure quality evidence is gathered for the accounts that are most at risk of being misstated. Keystone Inc. Company Background Keystone Inc. is a financial services company based in Sacramento, California. In $2024,$ Keystone purchased XBroker from Ron Smith. As part of the sale agreement, Ron was appointed to the Keystone board of directors. Keystone businesses also operate in various international markets. Keystone has wholly owned subsidiaries in Canada and Japan and has built a reputation for reliable trading technology. Keystone receives about $25\%$ of its total revenue from Canada, $10\%$ total revenue from Japan, with the remainder coming from the United States. Keystone launched a new data product line that included selling options and equities data to other f inancial markets and broker dealers. The Keystone corporate office has $358$ full$-$time employees but only five in the accounting department. The company employs two full$-$time managers and some part$-$time staff. Key positions in the Keystone accounting and IT area are as follows. $$ CFO: Henry Carpenter $$ Financial controller: Bob Carpenter $$ IT manager: Kyle Johnson The company does have an internal audit department. Keystone set a goal to increase revenue by $3\%$ each year. One of the critical success factors for the company to achieve this $3\%$ increase is to grow its share of the U$.$S$.$ equities trading business. However, with the new data products business there is an increase in costs, as well as the costs related to marketing and product branding. As a result, the management team is projecting a decline in earnings for the year. The company recently took out an additional loan of $$7$ million with Windsor Bank to help fund expansion efforts and to purchase additional real estate and hire personnel. This loan is repayable over f ive years. The company$$s other debt relates to loans issued more than five years ago from various lending institutions. The most recent financial statements for Keystone are provided in separate files.

Keystone operates in the financial services industry. It is highly competitive and faces intense price competition. Keystone is vulnerable to cyberattacks on an international scale, especially since it has experienced a broader and more distributed network footprint due to the COVID$-19$ pandemic.

Describe the next steps in the audit based on the risk assessment.$$Consider the following:

How do the internal and external risk factors inform the audit to be performed?

Determine the audit tests needed through financial data analysis.

What tests are needed?

What issues were found warranting the need for selected tests?

Analyze audit evidence for errors from financial data. Include the following:

Found errors

Impact of errors on the external audit

Explanation of possible errors from financial data

Describe how these audit strategies support the client profile and risk areas.

Determine evidence needed for substantive testing and risk assessment based on audit findings. Consider the following:

What other sample reports or materials need to be requested to fulfill this audit?