Timber Log Homes Ltd. (Timber) has produced log home kits in its current location of Langley, British Columbia, since 1987. Until recently, Dean Fortin, the chief operating officer, was the sole shareholder.

Wanting to fund future growth, Dean entered into an agreement with four venture capitalists who invested in the company in exchange for 49% of the common shares. They are interested in a reliable dividend stream and require a steady return; otherwise, they can require that their shares be repurchased at a premium. At the request of the venture capitalists, Timber follows IFRS standards and will now require an annual audit.

You, CPA, work for Tse and Smith, Chartered Professional Accountants, a firm that has recently been hired to audit Timber\'s September 30 year-end statements.

It is now October 6, 2020. Lisa Tse, a partner in the firm, has assigned you to complete the planning file because Janice Bruce, a colleague of yours, started maternity leave sooner than expected.

Lisa: Hi, Associate. Here are some excerpts from the audit planning memo (Exhibit I). Once you\'ve had a chance to review this information, please draft a memo to me that assesses risk of material misstatement at the overall financial statement level (OFSL) and assertion level based on the preliminary information provided. Also identify any other business or other risk issues I need to be aware of, as Dean appreciates any operational comments we have for Timber.

Exhibit I

Excerpts from audit planning memo prepared by Janice Bruce, associate

Mission

Timber\'s mission is to provide attractive, competitively priced, quality homes using traditional construction options. Timber achieves this objective by providing only a single kit model, using kiln-dried logs and taking advantage of the U.S. free trade agreement. Depending on the project size, these prefabricated, machined kits take as little as three days to assemble at a customer\'s site.

Standard log home kit

Timber offers a 1,250-square-foot rancher for $199,500. Purchasers expect to incur an additional $70,000 for finishings, plus the cost of land and infrastructure. The logs are cut to size, debarked by machine, and scribed on their underside so they fit tightly together. When completed, each log home is fully assembled, and each log is tagged at its corners and at door and window openings. The kit is then disassembled and placed in finished goods inventory until sold. There was no work in progress at year end and there were two completed kits on hand at year end.

Accounting information

Timber produces approximately 50 kits a year and earns a 20% gross profit margin. Because demand is sporadic, the company maintains an inventory of five to 10 kits. Net income has remained steady for the past several years at around $900,000, and preliminary materiality has been estimated at $60,000.

Timber uses a well-known accounting software for all aspects of its system. While the owners all have secure electronic access to the financial statement module, the minority shareholders prefer paper copies. As a result, the controller prints out a copy of the statements with support every week to send to them by courier.

New business

In order to expand, Dean recently initiated contracts in Asia. Customers pay for shipping and have the home assembled by a local contractor. If satisfied with the product, payment is due in 30 days; otherwise, they have 30 days to return the kit to Timber and must pay for the return shipping. Timber currently has two kits in Asia. One customer approved the purchase in late September but has not yet paid. The second customer has not paid and has not returned the kit after 90 days. Legal proceedings are being considered.

Required: Below prepare memo to Lisa.