It is June 2021. Company ABC makes primarily winter vests used by construction workers. ABC has a large loan from a bank. Previously the bank has accepted a Review engagement report but are now insisting on an audit for the year ended April 30, 2021.

In the past few years, ABC was losing sales as contractors were purchasing vests from other companies. Also, ABC made only vests in dark colours but contractors now wanted bright colours for safety reasons. ABC had to really cut back on manufacturing as demand declined.Large machines that we used to cut fabric were now idle, as were sewing machines and it was likely that staff, many that worked there since the company was founded would have to be let go.

ABC's reputation did not improve after a worker who was wearing a ABC vest was badly burned when their vest caught fire in late 2019. A subsequent investigation by the Ministry of Labour identified that the vest was made of acetate that is known to be very flammable.Safety regulations precludes the manufacture of vests from acetate unless it is treated with a flame retardant chemical.Until now, no lawsuit has been commenced regarding this matter. As the two-year period set out by the Limitations Act is coming up, a lawsuit is expected to be launched. ABC as a cost saving measure cancelled their 2021 insurance. Management of ABC is not aware if their insurance policy from 2019 would still provide insurance coverage or if a policy must be continued.

With the onset of COVID, ABC changed their production from winter vests to personal protective equipment - and in particular face masks.Revenues related to face masks was very strong and ABC in fact had one of their best years in terms of sales and profits.As a year end, inventory at ABC is $3,000,000.Half of that relates to face masks and around $400,000 relates to vests made from acetate.

John, CPA, is the audit partner on the PCC audit.During COVID, he was working from home and as he had some additional time prepared notes for purposes of the planning memo for PCC. His notes are as follows:

1.Preliminary materiality is $25,000 based on 5% of pretax income. Preliminary materiality is $25,000 based on my standard rate of 5% of pretax income. (no notation in the plan as to how determined).

2.Given the success of new product launch, risk of ABC not being a going concern is negligible and no further audit work or audit reporting related concern. Bank can be advised by us early on the ABC is a low credit risk.We can provide Bank with assurance that ABC will survive and be able to repay their loan;

3.Switch from Review to audit is seamless and will not require any additional audit work.Client is concerned about professional fees and we have guaranteed our fee for an audit will be the same as we charged for the review.

4.Risk at the OFSL is low.ABC founder's family members are always present so no fraud risk.

5.Inventory is as result of simple manufacturing process and therefore low RMM.Our audit work can be limited to checking perpetual records against general ledger balance.

6.Discussed the fire accident with ABC chief executive officer, Thomas.Thomas is very knowledgeable about all of this and it appears that what happened was the worker's fault.This is very fortunate for ABC as will not cost them anything.The lawyer that did all the ABC legal work is retiring and so no legal letter on this audit.

7.I asked about the machines in the factory that were not being used.Was told that the plan is to design some new products to use again. Therefore - All good in terms of depreciation etc.

8.The only liability that appears in the account is the bank loan.This is a further sign that no going concern issues.

9.Accounts receivables total $140,000.$100,000 of the loan is a receivable from Thomas's daughter to help her purchase a house.The remainder is from twenty other customers.Audit plan will be to send a positive confirmation to the daughter.Remainder of receivables likely not that material to worry about.

10.The plan is to issue an unmodified opinion.

Sally, CPA has been appointed the senior partner on the ABC account.Sally says she totally disagrees with most of what John is thinking or has stated.Sally has asked you, to prepare a confidential memo to her which evaluates the work that John has performed.The partner says your memo should address any concerns you have with this audit/audit plan, any accounting issues, your assessment of risk (and assertions), materiality and the type of work that will need to be completed.The senior partner is also wants to ensure that disputes do not take place between partners and senior managers and wonders what advice you have to avoid this going forward.Finally, the partner asks, if we would have gone ahead with things as John proposed, would he or our firm have any code of professional conduct exposure (any breaches??)