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6C-2 In the overall audit strategy for the audit of Keystone Computers \& Networks Inc. in Appendix 6C, there is a section on significant risks. For each of the risks, identify the implications and potential responses. (Estimated time: 20 minutes) Risk KNC has engaged in a strategy to sell to customers with higher credit risk. The officers of the company receive significant bonuses based on quarterly results. Implications and Response 7:07 . 11 7 : : Pate 217 FUG JiE 6,2 Engagraent Letter for Financial Statrment Audit Letterhead September 1.205 Mr. Tern Kexstone, Chairman of Board of Directors Keystone Computers \& Networks inc. 1464540 th Street Phoenix.AZ 84280 Dear Mr. Keystone: [The objective and scope of the audit] You have requested that we audit the financial statements of Keystone Computers. &. Networks in G. IKCN , which comprise the balance shees as of December 31, 205, and the related statements of income. chanpes in stockholders' eavity, and cash flows for the vear then ended, and the related notes to the financial statements We ate pleased to confirm our accertance and our understanding of this audit engagement by means of this letter. The objectives of our audit are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whother due to fraud or error, and to issue an aud tor's repert that includes our oninion. Reasonable assurance is a high level of assurance but is not absolute assurance and therefore is not a guarantee that an audit cenducted in accerdance with auditing standards generally acceoted in the United States of America (GAAS) will alwaxs detect a material misstatement when it exizts. Misstatements can arise from fraud or error and are considered material it individually or in the agoregate they would infuence the judgment made by a reasonable user basod on the financial statements. [The responsibilities of the auditer] We will conduct our audit in accordance with GAAS, As part of an audit in accordance with GAAS, we exercise professional wdyment and maintain.professional skepticism throughout the audi We also: [The responsibilities of the auditor] We will conduct our audit in accordance with GAAS, As part of an audit in accordanse with GAAS, we exercise proferssional yudgment and maintain professional skepticism throughout the audit. We also: - Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error design and perform audit orocedures responsive to those risks, and obtain audit evidence that is sufficiem and appropriate to provide a basis for our ocinion. The risk of not detecting a material misstatement tesulting from fraud is higher than for one resulting from error, as fraud may involve collusion forogry, intentional omissions. misrepresentations or the everride of internal centrol - Obtain an understanding of intemal control relevant to the audit in grder to design audit procedures that are apocerriate in the circumstances but not for the purpose of expcessing an epinion on the effectiveness of the entity's internal control. Howrever we will communicate to you in writing concerning anysignificent deficiencies or material weaknesses in intemal control felevant to the audit of the financial statements that we have identified during the audit. - Evaluate the arpeoriateness of accounting relicies used and the reasonableness of significant accounting estimates made by management, as well as the overall cresentation of the financial statements, inclusting the disclosures, and whether the financlal statements represent the underlying transactions and events in.a manner that achiewes fait presentation. - Conclude basad on the oudit evidence obtained, whether there are conditions or events, considered in the aggregate, that raise substantial doubt about KCN's ability to continue as a gaing concern for a reasonable poried of time. Because of the inherent limitations of an audit together with the inheront limitations of intornal control an unavoldable risk that some material misstatements may not be detected exists, even though the audit is properly. olanned and nerformed in accordance with GASS. IThe responsibilities of management and identification of the applicable financial reporting framework 7 Our audit will be cenducted on the basis that management and when appropgiate. those charged with govemance acknowledge and understand that they have responsibility Qur audit will be conducted on the basis thet management and when aprocriate those charoed with gewernance acknowledge and understand that they have responsibilitx a. for the eresaration and fair presentation of the financial statements in accordance with accounting. princioles generally. accepted in the United States of America: the apolicable financial reporting framework] Our audit will be conducted on the basis that management and when appropsiate. those charged with governance acknowledge and understand that they have responsibility Qur audit will be conducted on the basis that manegement and when appropriate these charged with gevernance acknowledge and understand that they hove responsibility a. for the preparation and fair presentation of the financial statements in accordance with accounting.princioles generally. accepted in the United States of America: b. for the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement. whether due to fraud or error: and c. to provide us with i. access to allinformation of which [management] is aware that is releyant to the preparation and fair presentation of the financial statements such as records documentation, and other matters: ii. additional information that we may reguest from [management] for the purpose of the audit: and iil. unrestricted access to persons within KCN from whom we determine it necessary to obtain audit evidence. As part of our audit erocess, we will reouest from imanagement and. when apcospriate, those charged with governancel written confirmation concerning tepresentations made to us in connection with the audit. [Other retevant information] Insert other information, such as fee arrangements, bilings, and other specific terms, as aboveoriate] [Reporting] We will issue a written report upen completion of our audit of KCNs financial statements, Our report will be addressed to the board of directors of KCN. Circumstances mav arise in which our resort mav For recurring audits, the auditors should assess whether the terms of the audit engagement need to be revised. Examples of factors that may make such revision appropriate include