QUESTIONS

1. Review the Financial Statements provided to each group on Blackboard (You may use laptops for this exercise). [ Focus on: a) Is the company Profitable b) Does the company have a lot of liabilities c) Are the cash flows positive d) How is the company using its cash e) Read Note 1 to learn about if the company has any parents or subsidiaries f) Read note 1 to understand the products the company sells g) Scan the other notes for any potential related party transactions h) scan the notes for any lawsuits.)
2. Determine the following risks AR = IR * CR * DR: (Use the 2 tables to help you determine what risk settings are appropriate. Table 1 gives you RMM- plug that vale into table 2). (HINT 1: Determine RMM first, then AR and then back into DR). (HINT 2: Use the facts above to determine IR & CR, Use your auditor judgement to determine AR & DR, remember auditors dont want to take too much risk, but also dont want to be in efficient.) i. Inherent Risk (Look at the notes and see if there is anything risky about this audit client, is it profitable, liabilities vs assets, any lawsuits, significant related party transactions. i.__________________________________. ii. Control Risk (Look at the information above to gauge information about the companys controls are they working/not working. Think about what we discussed in Chap 3 & 5 about what is low control risk and what is high control risk.)ii.__________________________________. iii. RMM (Risk of Material Misstatement): _____________ (Should be IR x CR you determined above, see table below for guidance.) iv. Audit Risk (Should generally be only choices (a), (b), or (c)) (Should be based on if the client is a publicly traded company, how much risk you are willing to take, complexity of the client, size of the company, chance of lawsuits, size of our audit firm, etc.) iv.__________________________________ v. Detection Risk (Remember you are generally backing into this figure after you figure out inherent risk, control risk, and audit risk.) v.__________________________________
3. Based on Reading the Financial statements and the information above do you think there are any potential Significant or Fraud Risks? (If so what are they, remember not every audit has specific significant or Fraud risks.)
4. For your audit approach would you choose to test controls or primarily perform substantive procedures based on your risk assessment in Q1 above, what would your mix of control testing to substantive testing be? (Pick 1 letter & Explain why briefly.) (a)50% controls, and 50% substantive (b) 20% Controls and 80% substantive (c) 0% Controls and 100% substantive (d) Other, Explain your percentages.

Statement of Financial Conditions

December 31, 2018

Assets

Cash and cash equivalents $ 3,741,204

Inventories 100,042

Property Plan & Equipment

(Net of Accum. Depr. Of $700,000) 710,753

Accounts receivable

(Net of $124, 280 allowance for uncollectible Accts.) 1,118,517

Goodwill 90,000,000

Investments at cost 634,347

Other assets 175,094

Total assets $ 96,479,957

Liabilities and Members Equity

Liabilities:

Notes Payable $ 139,690

Accounts payable and accrued expenses 180,579

Long Term Debt 2,000,000

Total liabilities 2,320,269

Stockholders Equity:

Common Stock (no Par Stock, 1 million shares outstanding) 91,130,688

Retained Earnings 3,029,000

Total Stockholders Equity 94,159,688

Total liabilities and Stockholders equity $ 96,479,957