Question 1 (12 points) BAO CORPORATION: You are an audit partner at XYZ Professional Corporation which provides public accounting (audit) services to clients. You are a licenced CPA performing public accounting (audit) services in the Province of Ontario. You are approached by Bao Corporation because they require a new auditor for their financial statements (the previous auditor retired from the profession and closed her auditing business). Bao operates its business in Toronto, Canada. It purchases goods made by local producers (arts and crafts, local foods, etc). These suppliers are often quite small businesses. 4: Bao is incorporated and its shares are owned by 40 shareholders which is a large number of shareholders compared to many other private corporations. However, despite the large number, these 40 shareholders are very not active at shareholder meetings and they tend to defer to management's explanation of the audited financial statements. Furthermore, Bao has banking arrangements with only one single bank and even this bank does not require audited financial statements to be provided Recently, Bao's sales have been declining, for many years even before the COVID-19 pandemic hit. Expenses have been cut as a response. Bao continues to make a acer O o $ A % 5 8 7 3 4 6 8 9 0 e r t U i g h k m Recently, Bao's sales have been declining, for many years even before the COVID-19 pandemic hit. Expenses have been cut as a response. Bao continues to make a profit, but only a very small one (profit margin is only 1% of gross sales). It is uncertain whether Bao will make a profit in the Calendar 2020 year. Bao's management maintains best-in-class business practices such as requiring all business to be clearly documented (for example, with its many small suppliers). Bao has never had even one dispute concerning payments to suppliers. Suppliers are known to appreciate the high ethical standards of Bao's management team. 3: Bao has been operating in this same business and facing the same types of repetitive transactions for many years. Their experienced accountant, Charles Dubcek, often says "I've seen it all. There is never any complicated transaction here at Bao. I like that type of consistency. It makes my job easy". e 4: REQUIRED: (a) Assess the risk of accepting this audit engagement. Provide analysis of elements of the situation which will increase and elements which will decrease the risk of accepting this audit engagement. (b) Make a recommendation: would you accept or not accept this audit engagement? acer C DII # ^ * $ 4 % 5 & 7 3 6 8 9 0 e r t u i d f h b Question 1 (12 points) BAO CORPORATION: You are an audit partner at XYZ Professional Corporation which provides public accounting (audit) services to clients. You are a licenced CPA performing public accounting (audit) services in the Province of Ontario. You are approached by Bao Corporation because they require a new auditor for their financial statements (the previous auditor retired from the profession and closed her auditing business). Bao operates its business in Toronto, Canada. It purchases goods made by local producers (arts and crafts, local foods, etc). These suppliers are often quite small businesses. 4: Bao is incorporated and its shares are owned by 40 shareholders which is a large number of shareholders compared to many other private corporations. However, despite the large number, these 40 shareholders are very not active at shareholder meetings and they tend to defer to management's explanation of the audited financial statements. Furthermore, Bao has banking arrangements with only one single bank and even this bank does not require audited financial statements to be provided Recently, Bao's sales have been declining, for many years even before the COVID-19 pandemic hit. Expenses have been cut as a response. Bao continues to make a acer O o $ A % 5 8 7 3 4 6 8 9 0 e r t U i g h k m Recently, Bao's sales have been declining, for many years even before the COVID-19 pandemic hit. Expenses have been cut as a response. Bao continues to make a profit, but only a very small one (profit margin is only 1% of gross sales). It is uncertain whether Bao will make a profit in the Calendar 2020 year. Bao's management maintains best-in-class business practices such as requiring all business to be clearly documented (for example, with its many small suppliers). Bao has never had even one dispute concerning payments to suppliers. Suppliers are known to appreciate the high ethical standards of Bao's management team. 3: Bao has been operating in this same business and facing the same types of repetitive transactions for many years. Their experienced accountant, Charles Dubcek, often says "I've seen it all. There is never any complicated transaction here at Bao. I like that type of consistency. It makes my job easy". e 4: REQUIRED: (a) Assess the risk of accepting this audit engagement. Provide analysis of elements of the situation which will increase and elements which will decrease the risk of accepting this audit engagement. (b) Make a recommendation: would you accept or not accept this audit engagement? acer C DII # ^ * $ 4 % 5 & 7 3 6 8 9 0 e r t u i d f h b