Risk assessment and responses for manufacturing inventory.

Sun-house solar Inc. (SHS) is a medium-size private company that develops solar energy systems for sale and installation in private residences. It is privately owned, with the majority of the shares held by the company president, Yong Shu. SHS started up five years ago. Its first two years were mostly involved in research and development. Over the past three years, SHS has been very successful and its customer sales and installations have grown continuously. SHSs main raw material is silicone, which it purchases on the world market so it can keep a one-year supply on hand at its factory in Woodbridge. It also has some purchase commitments for silicone at prices far above the current spot price which it would only use if there was a huge increase in the price of silicone on the world market.

Shu has engaged your audit firm to do the current years audit because she plans to obtain $20 million in financing to allow further commercialization of the SHS systems. The plan is to turn SHS into a public company and issue shares on the TSX. Your firm has accepted the engagement and assigned you to prepare the audit plan. You have obtained the preliminary general ledger trial balance from SHS chief financial officer. The CFO is a qualified professional accountant with 15 years experience as a financial officer in various public companies before joining SHS two years ago.

The following is a summary of the accounts that appear in this trial balance as at year-end:

Account	Balance
Cash	100,209
Accounts Receivable	85,019
Allowance for bad debts	(15,00)
Inventory, finished goods	100,550
Inventory, work in progress	44,666
Inventory, unassembled solar panels	67,890
Inventory, raw materials	834,445
Property, plant, and equipment	3,700,990
Accumulated amortization, property, plant, and equipment	(901,108)
Patents, at cost	1,010,000
Accounts payable	(198,009)
Warranty provision	(30,000)
Shareholder loan, non-interest bearing	(5,400,000)
Share capital, common shares	1,000
Retained earnings	1,261,558
Revenue	(4,812,202)
Cost of goods sold	1,666,502
General administrative expenses	802,500
Research and development expense	190,000
Other expenses	1,489,990

Required:

1. Identify three factors your audit firm would have to consider in order to accept the SHS audit engagement for the current year, and how each factor affects the acceptance decision

2. What materiality levels would you use for planning this audit? Show your calculations and justify your decisions. You can assume that your audit firms policy is that performance materiality should be 70% of the materiality level for financial statements as a whole, unless specific information indicates that a different value should be used.

3. What audit risk level would use want to achieve for this engagement? Describe your choice in terms of one of these levels: Highest, medium, lowest. Explain the factors that support your decision.

4. Identify and explain three business risk factors in SHS that you would need to understand in order to assess the risk of material misstatement in its financial statements.

5. Based on the business risk analysis for SHS, your audit manager is concerned that SHS finished goods inventory balance has a high risk of material misstatement. Your manager has asked you to assess the risk of material misstatement at the assertion level for this account. Use the high, medium or low to describe your assessments. Explain the factors that support your assessments

6. Outline a substantive audit program that responds to the risk at the assertion level that you have assessed, above, for SHSs inventory.