I need an help with the first three questions!

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DESCO Desco is a manufacturer of ceramic bathroom and kitchen fixtures located in Cornwall, Ontario. The president and owner of the company is Nico Deblieck. Deblieck started his career as a plumbing contractor. The plumbing company grew substantially over a 10-year period. Deblieck sold his interest in that company in 1994 for an enormous profit. Shortly thereafter, and because of a noncompete clause in the sales contract for the plumbing company, Deblieck decided to take over a floundering manufacturer of bathroom and kitchen fixtures, which he renamed Desco. This occurred in 2000. Deblieck is a down-to-earth individual who believes in the sanctity of his word and his handshake. He claims that \"he would never cheat a man 'lessen he had it comin'.\" He has no formal business education, tends to jump to quick conclusions about people, makes seat-of-the-pants business decisions, and can be rude and obnoxious to people he perceives as lazy or incompetent. In spite of this, he has succeeded at all his business ventures. The takeover of Desco was originally financed by the proceeds from the sale of his plumbing business and a small loan from the government's Canadian Business Development Bank. He is the only producer of kitchen and bathroom fixtures in Eastern Ontario. The company has expanded continuously since Deblieck took over and is always in need of working capital and additions to the fixed asset base. This has occasionally created a cash flow problem for the company, but the company currently has a substantial unused line of credit with a major Canadian bank. Deblieck has not been involved with the day-to-day operations of Desco for at least eight years, preferring to spend his \"golden\" years working on his golf handicap. He has three people who take care of most of the business for him, and he checks in with them on an irregular basis. Frank Robson (General Manager): Robson has been running the day-to-day operations of Desco for over ten years. Deblieck admits that Robson's energy, devotion, and salesmanship are the main reasons why Desco has been so successful and grown so rapidly. He is the sole \"salesman\" for the company and also supervises the manufacturing operations. He has no accounting responsibilities but does sign checks (general and payroll) based on the documentation prepared by the bookkeeper. He also distributes bi-weekly pay checks. He and his crew take an annual year-end physical inventory under your firm's supervision. He is extremely well paid (over $100,000), but the company has no profitsharing plan. You consider him to be competent, honest, and loyal to Deblieck. Maria Callens (Receptionist and clerk): Besides answering the phone and typing letters, Maria also takes phone orders from customers, prepares and mails monthly statements to costumers (based on the accounts receivable sub-ledger), and prepares and makes daily bank deposits. Harold Blay (Bookkeeper): Harold performs most of the accounting functions for the company. Sales are recorded in a sales journal based on shipping documents and disbursements are prepared based on vendors' invoices when they are due. Harold prepares payroll and general checks. He reconciles the bank account monthly. Harold has been with the company for 10 years and is dedicated and hardworking. The company does not maintain a subsidiary ledger for accounts payable or an inventory of fixed assets. In the past, Desco has hired a small local accounting firm to provide write-up services on a monthly basis. These include posting general ledger accounts and preparing rudimentary financial statements (without footnotes). These statements are reviewed by Deblieck. On an annual basis, the accounting has also helped the company prepare inventory adjustments based on their physical inventory and the application of lower of cost or market. Your firm has been engaged to audit Desco because the bank providing the line of credit is requiring Desco to be audited annually. You are currently getting ready to audit the financial statements for 2015 (see Exhibits 2-1 and 2-2). Exhibit 2-1 Desco Balance Sheet December 31, 2015 and 2014 Cash and cash equivalents Trade receivables Allowance for doubtful accounts Raw materials inventory Work in progress inventory Finished goods inventory Prepaid expenses Land Buildings and improvements Machinery and equipment Vehicles Accumulated depreciation Notes payable Accounts payable Accruals Current portion of long-term debt Long-term debt Common stock Retained earnings 2015 35,800 120,280 (12,280) 37,930 49,373 72,945 1,225 38,000 228,115 89,325 72,892 (74,890) 658,715 2014 16,780 87,800 (11,280) 54,375 34,378 62,177 1,600 38,000 203,615 76,025 75,325 (62,280) 576,515 50,000 67,278 7,800 25,000 125,000 175,000 208,637 658,715 22,500 47,280 11,750 25,000 150,000 175,000 144,985 576,515 Exhibit 2-2 Desco Statement of Earnings December 31, 2015 and 2014 2015 511,250 709,275 1,220,525 2014 490,063 522,800 1,012,863 (170,750) (376,025) (546,775) (169,780) (374,280) (544,060) 673,750 468,803 (22,500) (5,250) (18,930) (17,800) (23,945) (20,660) (4,500) (17,820) (6,325) (21,250) Wages and salaries Office supplies Bad debts Professional services Taxes and licenses Advertising Interest Depreciation Payroll taxes Insurance (149,325) (5,563) (4,225) (11,672) (14,375) (6,150) (21,780) (3,930) (9,892) (1,500) (137,390) (4,993) (1,725) (7,117) (13,390) (7,280) (19,750) (3,238) (7,730) (1,250) Income before taxes Income taxes 356,913 (121,351) 194,385 (66,091) Net income Beginning retained earnings Dividends 235,562 144,985 (171,910) 128,294 112,820 (96,129) 208,637 144,985 Sales: Bathroom division Sales: Kitchen division Cost of goods sold: Materials Cost of goods sold: Labor Gross margin Manufacturing overhead: Depreciation Insurance Utilities Repairs and maintenance Other General expenses: Ending retained earnings Requirements The following questions might have more than one correct answer. Therefore, when answering them clearly explain your reasoning and any potential assumptions. 1. 2. 3. Do you consider this engagement to be high, moderate, or low risk? Translate that assessment into an assessment of acceptable audit risk. In order to do this, you can use the audit risk model and its components. Explain your answer. What conditions are you aware of that would increase or reduce the risk of material misstatement (inherent risk x control risk) and potentially audit risk in certain accounts? Indicate the condition and the account(s) affected, and explain your answer. What level would you set for overall planning materiality? Explain your answer. 4. Rate the risk of potential material errors for this engagement as low, moderate, or high for each of the following audit areas. Also indicate the level of tolerable error you would use for each account. Justify your conclusions. Low Moderate High Tolerable Error Accounts receivable ------ ------ ------ ------ Inventory quantities ------ ------ ------ ------ Inventory pricing ------ ------ ------ ------ Fixed assets ------ ------ ------ ------ Accounts payable ------ ------ ------ ------ Expenses ------ ------ ------ ------ Revenues ------ ------ ------ ------ Contingencies ------ ------ ------ ------ 5. Given your prior responses, indicate the nature and extent of testing that you would perform in each of the following areas. E = Extensive M = Moderate L = Little N = None * = Not applicable TOC TT AP TD Accounts receivable ------ ------ ------ ------ Inventory quantities ------ ------ ------ ------ Inventory pricing ------ ------ ------ ------ Fixed assets ------ ------ ------ ------ Accounts payable ------ ------ ------ ------ Expenses ------ ------ ------ ------ Revenues ------ ------ ------ ------ Contingencies ------ ------ ------ ------ Where: TOC = Test of Controls TT = Substantive Tests of Transactions AP = Analytical procedures TD = Tests of Detailed account balances 6. Identify the account that will have the highest likelihood of material misstatement and document, in a memo to the file, your approach to testing that account. 7. Do you have any suggestions to include in a management letter to Desco? Consider cost-effective and practical changes to the control system and operation