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 financial 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 five 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. CPA Firm Penmen Associates Penmen Associates is a U.S.-based accounting firm with offices located in most major cities. Penmen Associates will be conducting the January 31 audit for Keystone, Inc., a publicly traded company. The firm has begun the planning phase of the external audit for Keystone and has assigned you the task of preparing for the audit. As part of the audit's detailed risk assessment phase, you will evaluate Keystone's internal control structure, financial accounts, business environment, materiality, and any inherent risks that may impact the company. You will review external and other factors and interview data that could impact the audit. This understanding will help you develop an audit program and design its nature, extent, and timing.