Overlook Video Stores Inc. (OVS) is a privately-held chain of DVD rental stores headquartered in Toronto. The company was incorporated in 1992 and has gone from a single store in Toronto to over 30 stores throughout Ontario. Harford & Harford, LLP (H&H) has been the auditors for OVS since its inception. You, CA, are the audit senior on the OVS audit for the year ending December 31, 2005.

After years of slow and steady growth, OVS began expanding in two directions.

• First, OVS opened ten new video stores in 2005. In the past, OVS had only opened one store per year, but Victor felt more rapid expansion was necessary.
• Second, OVS moved into the Internet-based DVD rental business by launching a new website, www.MoviesByMail.ca. The expansion was financed by a ten-year term loan from OVSs bank. Victor noted that the bank now seems concerned with the profitability of the company.

The controller of OVS has faxed us the interim financial statements for the 11 months ended November 30, 2005 (Exhibit I). These should help you in your audit plan.

Other Info:

No Late Fees

OVS also introduced a new program called No Late Fees during 2005. OVS eliminated late fees for its customers. However, to prevent abuse of this program, after 30 days if the movie is not returned, the outstanding movie is considered sold to the customer who rented it. The next time the customer comes to the store, there will be a charge of $25, the price of purchasing a new DVD. While the program has been tremendously successful, according to Victor as it has increased rental revenue and increased sales of DVDs, most customers who were charged for an over-30-day DVD have refused to pay for it and simply returned the DVD to an OVS store.

Movies By Mail

When customers first subscribe to the Movies By Mail service at the store, they supply their credit card number and agree that it will be charged $30 at the end of each month until they cancel their subscription. To rent a DVD, customers log on to the website, browse the DVD rental library and make a movie request. The customer is then mailed his or her movie. Once the customer is finished watching a particular DVD, he or she returns it by mail in a postage-paid envelope. During the introduction period of Movies By Mail, OVS offered new customers the option of paying $500 up front for three years of DVD rentals by mail. Many customers took advantage of this option due to its substantial savings.

1. Evaluate 4 factors that impact the audit risk assessment for the current year. Indicate how these factors influence audit risk (i.e. increase or decrease audit risk) and make an overall conclusion. (5 marks)

Risk Factor	Increase/ Decrease
Overall Conclusion: