QUESTION 2 - Materiality and Audit Risk - 18 marks Caf Beans Limited started operations in 2015. The company is owned and operated by the two shareholders, Jack Roast (50%) and Samantha Mugg (50%). The company owns 12 coffee shops in the Niagara Region of Ontario, Caf Beans' biggest competition comes from the local Starbucks coffee shops because the quality of the beans is similar between the two companies. The company experienced growth until the spring of 2019 when COVID 19 slowed operations to almost a stand still. The company followed all government guidelines and applied for and received government assistance made available for small businesses like Caf Beans. With many restrictions being lifted, the company is now fully operating at pre-pandemic levels. Since its last yearend all coffee shops are experiencing growth. The company's year end is June 30. The owners Jack and Samantha are now considering bringing in a new shareholder who will provide new funding to meet growth objectives and opportunities. Caf Beans follows the ASPE framework as required by the bank who provides both a line of credit and an operating loan. The terms of the banking agreement require the company to submit audited financial statements within 60 days of yearend. The financial statements are also used as a basis to calculate bonuses paid to managers (currently there are 4 managers) who each manage 3 coffee shops. Bonuses are based on revenue growth and net income per each coffee shop managed by the manager. It is now November 4, 2021. You are a co-op student at the firm Myers and Syers LLP. The partner you are working for has asked you to address the following questions and to document your answers in the current year audit file. 1. Based on the scenario above answer the following: a. Identify at least 3 users and their reporting objectives, 6 marks (1 mark for each user and 1 mark for the related reporting objective) I will provide one example, but you cannot use this one as part of your answer. "The Canada Revenue Agency (CRA) is a user of the financial statements because they will want to ensure that Caf Beans paid their fair amount of taxes by reviewing the net income reported to them." b. Identify the main user of the financial statements and why you choose this user as the main user. 2 marks c. Explain the base you would use to calculate the materiality and why. 2 marks 2. AR = IR x CRX DR or AR-Inherent Risk x Control Risk x Detection Risk Define in your own words the term "audit risk" (AR). 1 mark Explain in your own words each component of the audit risk model, i.e., what is inherent risk (IR), control risk (CR) and detection risk (DR). 3 marks (1 mark for each component explained) 3. Identify 3 inherent risk factors based on the information provided and your knowledge of the company's industry, the economic conditions in the Niagara region, general business conditions or other factors you feel are relevant. Use your definition of inherent risk in 2 above to guide your analysis. If you use any outside resources to research the business/economic conditions of the Niagara region, please ensure you provide the appropriate citations. 4 marks QUESTION 2 - Materiality and Audit Risk - 18 marks Caf Beans Limited started operations in 2015. The company is owned and operated by the two shareholders, Jack Roast (50%) and Samantha Mugg (50%). The company owns 12 coffee shops in the Niagara Region of Ontario, Caf Beans' biggest competition comes from the local Starbucks coffee shops because the quality of the beans is similar between the two companies. The company experienced growth until the spring of 2019 when COVID 19 slowed operations to almost a stand still. The company followed all government guidelines and applied for and received government assistance made available for small businesses like Caf Beans. With many restrictions being lifted, the company is now fully operating at pre-pandemic levels. Since its last yearend all coffee shops are experiencing growth. The company's year end is June 30. The owners Jack and Samantha are now considering bringing in a new shareholder who will provide new funding to meet growth objectives and opportunities. Caf Beans follows the ASPE framework as required by the bank who provides both a line of credit and an operating loan. The terms of the banking agreement require the company to submit audited financial statements within 60 days of yearend. The financial statements are also used as a basis to calculate bonuses paid to managers (currently there are 4 managers) who each manage 3 coffee shops. Bonuses are based on revenue growth and net income per each coffee shop managed by the manager. It is now November 4, 2021. You are a co-op student at the firm Myers and Syers LLP. The partner you are working for has asked you to address the following questions and to document your answers in the current year audit file. 1. Based on the scenario above answer the following: a. Identify at least 3 users and their reporting objectives, 6 marks (1 mark for each user and 1 mark for the related reporting objective) I will provide one example, but you cannot use this one as part of your answer. "The Canada Revenue Agency (CRA) is a user of the financial statements because they will want to ensure that Caf Beans paid their fair amount of taxes by reviewing the net income reported to them." b. Identify the main user of the financial statements and why you choose this user as the main user. 2 marks c. Explain the base you would use to calculate the materiality and why. 2 marks 2. AR = IR x CRX DR or AR-Inherent Risk x Control Risk x Detection Risk Define in your own words the term "audit risk" (AR). 1 mark Explain in your own words each component of the audit risk model, i.e., what is inherent risk (IR), control risk (CR) and detection risk (DR). 3 marks (1 mark for each component explained) 3. Identify 3 inherent risk factors based on the information provided and your knowledge of the company's industry, the economic conditions in the Niagara region, general business conditions or other factors you feel are relevant. Use your definition of inherent risk in 2 above to guide your analysis. If you use any outside resources to research the business/economic conditions of the Niagara region, please ensure you provide the appropriate citations. 4 marks