Virtual Reality, Inc. Statement of Financial Condition December 31, 2020 $. 1.741,204 6,500,042 Assets Cash and cash equivalents Inventories Property Plan & Equipment (Net of Accum. Depr. Of $1,700,000) Accounts receivable (Net of $1,124,280 allowance for uncollectible Accts.) Other assets 3,710,753 4,718,517 1,175,094 Total assets $ 17,485,610 Liabilities and Member's Equity Liabilities: $ Notes Payable Accounts payable and accrued expenses Long Term Debt Total liabilities 5,139,690 180,579 5,000,000 10,320,269 Stockholder's Equity: Common Stock (no Par Stock, 1 million shares outstanding) Retained Earnings Total Stockholder's Equity 4,496,341 3,029,000 7,525,341 Total liabilities and Stockholder's equity $ 17,485,610 See accompanying notes to financial statements. Virtual Reality, Inc. Statement of Operations Year ended December 31, 2020 $ Revenues Technology Income (Net of Sales Returns and Discounts) Dividend and Interest Income Other revenue Total Revenues 30, 174,531 10,597 4,159 30,189,287 Expenses Cost of Goods Sold Fees to Parent for rent, staff, etc. Legal, professional, audit, and regulatory fees Salary Expense Interest expense Depreciation & Amortization expense Other expenses Total Expenses Settlement expense (from lawsuit) 15,832,849 1,200,000 207,398 1,014,336 15,526 70,000 65,646 18,405,755 1,000,000 Net Income $ 10,783,532 See accompanying notes to financial statements. 1) Review the Financial Statements provided to each group on Blackboard (You may use laptops for this exercise). [ Focus on: a) Is the company Profitable b) Does the company have a lot of liabilities c) Are the cash flows positive d) How is the company using its cash e) Read Note 1 to learn about if the company has any parents or subsidiaries f) Read note 1 to understand the products the company sells g) Scan the other notes for any potential related party transactions h) scan the notes for any lawsuits.) Summarize some of the information you found the most relevant below. 2) Determine the following risks "AR = IR * CR * DR": (Use the 2 tables below to help you determine what risk settings are appropriate. Table 1 gives you RMM-plug that vale into table 2) (HINT 1: Determine RMM first, then AR and then back into DR) (HINT 2: Use the facts above to determine IR & CR, Use your auditor judgement to determine AR & DR, remember auditors don't want to take too much risk, but also don't want to be in efficient.) i. Inherent Risk (Look at the notes and see if there is anything risky about this audit client, is it profitable, liabilities vs assets, any lawsuits, significant related party transactions. Think about what we discussed in Chap 3 & 5 about what is low inherent risk and what is high inherent risk.) ii. Control Risk (Look at the information above to gauge information about the company's controls are they workingot working. Think about what we discussed in Chap 3 & 5 about what is low control risk and what is high control risk.) ii. _ iii. RMM (Risk of Material Misstatement): (Should be IR x CR you determined above, see table below for guidance.) iv. Audit Risk (Should generally be only choices (a), (b), or (c)) (Should be based on if the client is a publicly traded company, how much risk you are willing to take, complexity of the client, size of the company, chance of lawsuits, size of our audit firm, etc.) iv.___. v. Detection Risk (Remember you are generally backing into this figure after you figure out inherent risk, control risk, and audit risk.) V. Look at pick Below for 3-4 3) Based on Reading the Financial statements and the information above do you think there are any potential Significant or Fraud Risks? (If so what are they, remember not every audit has specific significant or Fraud risks.) [Look up the definition of a fraud risk and significant risk to help you answer this question.] 3. 4) For your audit approach would you choose to test controls or primarily perform substantive procedures based on your risk assessment in Q1 above, what would your mix of control testing to substantive testing be? (Pick 1 letter & Explain why briefly.) (a)50% controls, and 50% substantive (b) 20% Controls and 80% substantive (c) 0% Controls and 100% substantive (d) Other, Explain your percentages 4 AUDIT RISK MODEL = RMM Inherent Risk x * Control Risk DR LOW LOW MODERATE LOW MOD LOW High High High Moderate Low Moderate or Low Moderate or Low High Moderate Low High High Moderate Low = - Risk of Material AR Misstatement High VERY LOW High Moderate Moderate LOW Low Low Low MODERATE MODERATE HIGH LOW MODERATE LOW HIGH 1 MODERATE HIGH HIGH MODERATE Virtual Reality, Inc. Statement of Financial Condition December 31, 2020 $. 1.741,204 6,500,042 Assets Cash and cash equivalents Inventories Property Plan & Equipment (Net of Accum. Depr. Of $1,700,000) Accounts receivable (Net of $1,124,280 allowance for uncollectible Accts.) Other assets 3,710,753 4,718,517 1,175,094 Total assets $ 17,485,610 Liabilities and Member's Equity Liabilities: $ Notes Payable Accounts payable and accrued expenses Long Term Debt Total liabilities 5,139,690 180,579 5,000,000 10,320,269 Stockholder's Equity: Common Stock (no Par Stock, 1 million shares outstanding) Retained Earnings Total Stockholder's Equity 4,496,341 3,029,000 7,525,341 Total liabilities and Stockholder's equity $ 17,485,610 See accompanying notes to financial statements. Virtual Reality, Inc. Statement of Operations Year ended December 31, 2020 $ Revenues Technology Income (Net of Sales Returns and Discounts) Dividend and Interest Income Other revenue Total Revenues 30, 174,531 10,597 4,159 30,189,287 Expenses Cost of Goods Sold Fees to Parent for rent, staff, etc. Legal, professional, audit, and regulatory fees Salary Expense Interest expense Depreciation & Amortization expense Other expenses Total Expenses Settlement expense (from lawsuit) 15,832,849 1,200,000 207,398 1,014,336 15,526 70,000 65,646 18,405,755 1,000,000 Net Income $ 10,783,532 See accompanying notes to financial statements. 1) Review the Financial Statements provided to each group on Blackboard (You may use laptops for this exercise). [ Focus on: a) Is the company Profitable b) Does the company have a lot of liabilities c) Are the cash flows positive d) How is the company using its cash e) Read Note 1 to learn about if the company has any parents or subsidiaries f) Read note 1 to understand the products the company sells g) Scan the other notes for any potential related party transactions h) scan the notes for any lawsuits.) Summarize some of the information you found the most relevant below. 2) Determine the following risks "AR = IR * CR * DR": (Use the 2 tables below to help you determine what risk settings are appropriate. Table 1 gives you RMM-plug that vale into table 2) (HINT 1: Determine RMM first, then AR and then back into DR) (HINT 2: Use the facts above to determine IR & CR, Use your auditor judgement to determine AR & DR, remember auditors don't want to take too much risk, but also don't want to be in efficient.) i. Inherent Risk (Look at the notes and see if there is anything risky about this audit client, is it profitable, liabilities vs assets, any lawsuits, significant related party transactions. Think about what we discussed in Chap 3 & 5 about what is low inherent risk and what is high inherent risk.) ii. Control Risk (Look at the information above to gauge information about the company's controls are they workingot working. Think about what we discussed in Chap 3 & 5 about what is low control risk and what is high control risk.) ii. _ iii. RMM (Risk of Material Misstatement): (Should be IR x CR you determined above, see table below for guidance.) iv. Audit Risk (Should generally be only choices (a), (b), or (c)) (Should be based on if the client is a publicly traded company, how much risk you are willing to take, complexity of the client, size of the company, chance of lawsuits, size of our audit firm, etc.) iv.___. v. Detection Risk (Remember you are generally backing into this figure after you figure out inherent risk, control risk, and audit risk.) V. Look at pick Below for 3-4 3) Based on Reading the Financial statements and the information above do you think there are any potential Significant or Fraud Risks? (If so what are they, remember not every audit has specific significant or Fraud risks.) [Look up the definition of a fraud risk and significant risk to help you answer this question.] 3. 4) For your audit approach would you choose to test controls or primarily perform substantive procedures based on your risk assessment in Q1 above, what would your mix of control testing to substantive testing be? (Pick 1 letter & Explain why briefly.) (a)50% controls, and 50% substantive (b) 20% Controls and 80% substantive (c) 0% Controls and 100% substantive (d) Other, Explain your percentages 4 AUDIT RISK MODEL = RMM Inherent Risk x * Control Risk DR LOW LOW MODERATE LOW MOD LOW High High High Moderate Low Moderate or Low Moderate or Low High Moderate Low High High Moderate Low = - Risk of Material AR Misstatement High VERY LOW High Moderate Moderate LOW Low Low Low MODERATE MODERATE HIGH LOW MODERATE LOW HIGH 1 MODERATE HIGH HIGH MODERATE