The following assignment is about Aurora Toolworks Limited, a fictional company.

It is asked to complete the KNOWLEDGE OF THE CLIENT'S BUSINESS CHECKLIST.

It is also required to

a)Fill out the client acceptance checklist.

Significant weight is assigned to the Economic Analysis and Knowledge of Industry sections.

b)Perform a preliminary analysis of the financial information, meaning booth vertical and horizontal analysis.

c) What few sentences expanding on the needs of the key users of these financial statements would be?

d) What type of engagement would you recommend?

e) Calculate materiality based on the information given and justify calculation.

f)Identify four areas of inherent risk that might affect your audit planning. Would you say these are high risks or low?

g) Would you recommend RMK accept this assignment?

Aurora Toolworks Limited

Case Notes

Sergeant Castings and Tools was founded in Bathurst, New Brunswick in 1942 to support the Canadian war effort. Postwar, it transitioned to a manufacturer of stationary tools to serve the rapidly growing house building industry. Over time, its army-green table saws, drill presses, and jointers made their way from contractors to home hobbyists living in the suburbs. By 2001, changing demographics, and pressure from imports made of lighter materials, reduced the demand for Sergeant's heavy cast-iron to the point where it was put into bankruptcy.

"When I was a kid, my grandfather had a Sergeant saw in his Quonset," says Brad Ryder, CEO of Aurora Toolworks Limited (Aurora). He continues, "When I finally got to the stage in life where I could have my own workshop, they were already under."

"Talking to some friends who also like woodworking, we all were looking at good saws and we all remembered those big heavy Sergeant tools. A couple of months later, I meet a guy at a woodworking show. We're looking at a $4,000 saw and I say something about Sergeants. Turns out the guy, Ron Smith, now our VP Manufacturing, knew their story. One thing led to another, and, since I am a CPA myself, I contacted the receiver. On a whim, I got some of my friends, some investors I know, and Ron, and put in an offer for the name, designs and the patents. All it cost us was $10,000."

"The manufacturing machines had been sold for scrap, but there was no point in trying to get the old factory running anyway. I contacted the last president of the company, Ral Daoust. He said the machines were all old and not efficient, and that led to the cost overruns. So now we had spent $10,000 basically for memorabilia."

"Ken Mistry, one of the guys, took a saw design and a couple months later, he had made a saw off of it. The guy's a heart surgeon! Anyway, it was a labour of love. He even updated the design to meet current safety standards. Now, his is out of wood, not steel, but it showed us that this could be a real thing."

"The problem in the market is that you cannot buy a decent saw for fine woodworking under $1,500. Then there is nothing really until $3,000 plus. And Asian manufacturers have a shipping cost disadvantage if you are not talking about plastic tools. For us, there is a space, yes, a small space, for quality tools that sit between these price points, are made in Canada, and appeal to serious woodworkers."

"The group that kicked in the $10,000 put in another $50 K to hire an engineer, rework some of the designs along with Ken's improvements, cut weight where it was not needed, updated safety features even further, and then set about getting the parts made using various manufacturers. We also rented a shop, and we would assemble the parts there ourselves. We sold a few machines by word of mouth, but the reality is we all had day jobs, and buying parts meant most of our profit went to our suppliers. It was a hobby that was becoming an expensive hobby."

"As it turns out, the international company I was with was reorganizing. I got a nice severance package so with time on my hand I started working on this full time and rented a real factory with employees. When we reincorporated under the CBCA in 2016, we intended to use the Sergeant name because we have the rights to the tradename. Except that there were some old lawsuits out there that would have made it tricky if we resurrected the name. We went with Aurora after the aurora borealis."

"Sales exceeded our expectations. Baby boomers about to retire also remembered these saws from when they were kids. Among the five of us, we raised another $2,000,000 to get the manufacturing up. Larger parts like the cast iron top were still using outside suppliers."

"We have been getting great reviews for our product. Our price point is right on, but our costs are very high. Right now, we are private, and our bank, The Bank of New Glasgow at 49 Water Street, has provided a good line of credit but we cannot grow production as we are."

"The bank is getting concerned. The line of credit is up to $ 1,000,000 but it is callable any time. Our factory lease expired in January. Now we are month to month. We did buy some land in London to set up our own factory, but after funding that purchase, the partners said they would not put more money in. This year, I had to lend back my salary just to keep the bank happy."

"I'm negotiating with the province and the city of London to get some grants to set up there. I'm also negotiating with other cities. Space in Central Ontario is just too expensive. If we could finance it, we could put up a purpose-built building for around $10 million. Over twenty years, that's a third of what we are paying for factory space now, and it won't increase."

"Doing more of our own machining in house would drop materials costs by at least 15%. Saving on the factory rent, and saving on materials, would have been about $1,400,000 last year. Plus, I think the market will permit us to double sales easily if we could ramp up production."

"If we reshuffle the sales model, we could sell direct to consumers meaning far less in receivables and in inventory. We sell through a number of smaller retailers on a consignment basis. Collecting from them is a bit hard. Sometimes I think we are financing their businesses as well as ours."

"Here's the good news: I have a new buyer group. It's a venture capital corporation out of Alberta. That's like a SPAC that's all the rage in New York right now, but Alberta venture issuers have been around forever. I can keep my 20%, my current partners will get bought out and basically double their money. Ron can retire. The bank gets its money."

"Only thing is, we need an audit. Can you do it for us? If so, contact our Controller, Janet Yeung. She finished her CPA just two years ago and she's really eager to just have her team focus on accounting and not daily cash flow."

KNOWLEDGE OF THE CLIENT'S BUSINESS CHECKLIST

This appendix provides a checklist that may help the auditor obtain and document knowledge of some of the characteristics of the client's business. This checklist is not meant to be an exhaustive list of the characteristics of the client's business that may be important for the audit. In addition, this checklist is not designed to group all of the information necessary for understanding internal control for planning purposes and assessing control risk.

I. KNOWLEDGE OF THE ENTITY

A.

CHARACTERISTICS OF OWNERSHIP AND MANAGEMENT

1.

Type of entity:

Corporation

Sole proprietorship

Private

Public

Joint venture

Crown corporation

General partnership

Not-for-profit organization

Limited partnership

Other (describe)

2.

Jurisdiction of incorporation:

Statute:

Date:

3.

Listed on stock exchange: (name of stock exchanges, listed securities)

4.

Principal owners, directors and officers:

Name-

Title-

% interest-

I. KNOWLEDGE OF THE ENTITY

B.

OPERATIONS

1.

Nature of activities (manufacturing, distributing, service, etc.; industrial, commercial, residential, individual, etc.):

Description of products and services-

% of activities-

2.

Territory covered

Location-

% of activities-

3.

Production or sales cycles

4.

Patents, trademarks, rights, permits:

I. KNOWLEDGE OF THE ENTITY

C.

FINANCIAL POSITION

2.

Sources of financing:

Financial institutions (name, address, bank accounts)

Other sources of financing:

3.

Is there a doubt as to the entity's ability to continue as a going concern?

D.

INFORMATION SYSTEMS

1.

Accounting records and documents:

Accounting cycle or subsystem-

System or software-

Frequency-

Our IS specialty group will look at system after we agree to audit.Current system is a small network with a PC server.Manufacturing systems are based on a DELL T610 with numerically controlled integrated management software.The manufacturing system does not produce accounting information, so we do not need to study it.

2.

Description of computerized system:

Our IS specialty group will look at system after we agree to audit.Current system is a small network with a PC server.Manufacturing systems are based on a DELL T610 with numerically controlled integrated management software.The manufacturing system does not produce accounting information, so we do not need to study it.

II. KNOWLEDGE OF THE INDUSTRY

1.

Economic conditions of the industry: (market conditions, decline or expansion of business, price changes, economic cycle of products, etc.):

2.

Description of technological changes, internationalization of business transactions and

their effects on the market:

3.

Major competitors:

Name-

Products or services offered-

4.

Financial statement users and reporting requirements:

5.

Specific knowledge required of the audit team:

Type of knowledge Description

Canadian accounting standards

US accounting standards

Other accounting standards

Specific industry guidance

Materiality:

Materiality should be calculated as:

This amount is appropriate for the following reasons: