(See also Risk Tenns sheet on moodle) Your audit firm was recently engaged to conduct the financial statement audit for BBH Automotive, an original equipment manufacturer (OEM) in the automotive industry. As the senior manager on the engagement, you are performing initial audit planning and developing an understanding of BBH's business and industry. While the lead engagement partner has experience in the automotive industry, you have only worked on one other automotive engagement. As part of the planning process, you are reviewing news articles and thought papers on the impact of autonomous vehicles on the industry, including OEMs. You come across a 2017 publication by KPMG titled "Islands of Autonomy: How Autonomous Vehicles Will Emerge in Cities Around the World," in which the authors predict that sales of personally owned sedan vehicles in the U.S. will drop from approximately 5.4 million in 2017 to 2.1 million by the year 2030 due to shifts in mobility patterns, particularly in major cities. You are also aware that BBH Automotive recently had a significant recall on one of their parts that is a component of a popular sedan sold by one of the large automotive manufacturers. You read that a lawsuit has been filed related to an accident caused by the defective part. Required a. Based on the information above, identify at least three business risks for BBH Automotive. b. What impact could each of these business risks potentially have on the client's financial statements, including footnote disclosures? Be specific in terms of the accounts and disclosures affected and in what way they would be affected. C. You meet with the lead engagement partner and she asks you to provide a more in-depth assessment of the potential impact of autonomous vehicles on the automotive supplier market in preparation for a meeting with the CEO of BBH. Go to the KPMG website and access the "Islands of Autonomy" publication, or other publications from KPMG U.S. Manufacturing Institute's Automotive Center about the future of the automotive industry, at www.kpmg.com/us/automotive. Identify at least two additional risks related to autonomous vehicles, and draft questions related to these business risks as well as the business risks identified in part a. above. You will ask BBH Automotive's CEO about how the company plans to address these risks. d. What are additional sources of information that you could use to identify additional potential business risks? Risk Terms Acceptable audit risk - a measure of how willing the auditor is to accept that the financial statements may be materially misstated after the audit is completed and a clean opinion has been issued Audit assurance - Equal to (1 - AAR) Client business risk-risk that the entity fails to achieve its objectives related to (1) reliability of financial reporting, (2) effectiveness and efficiency of operations, and (3) compliance with laws and regulations Control risk --- risk that internal controls will not prevent or detect material misstatement Engagement risk risk that the auditor (or firm) will suffer harm after the audit is finished, even though the report was correct Inherent risk - susceptibility of an assertion to material misstatement before we consider controls Planned detection risk - a measure of the risk that audit evidence for a segment will fail to detect misstatements that could be material, should such misstatements exist. PDR - AAR/(IR CR) Risk of material misstatement - risk that the financial statements contain a material misstatement due to fraud or error prior to the audit Significant risk any risk that the auditor deems to require special attention
