You are a partner at ABC CPA, and you are auditing June 30, 2020 financial statements of Agriq Inc. AgriEq is a manufacturer of agricultural equipment (tractors, large plows, etc.). This is the first year ABC CPA is auditing this company. In the past they were audited by OLD CPA; Agriq decided to switch auditors because ABC CPA has more experience auditing manufacturing clients. Last year OLD CPA issued an unmodified opinion. When you communicated with Rebecca Black, the partner at OLD CPA who was in charge of the past audits for Agriq, she indicated that the audit team always found a lot of errors in accounting each year, but the CFO always booked all the adjustments as recommended by the auditors and never questioned them.Rebecca also told you that last year she had no disagreements with management, as well as no issues related to fraud.
The company was founded by Ms. Jenny Smith and Mr. John Leblanc 10 years ago. The company is private, and is owned by Jenny Smith, John Leblanc and five other partners, who are not working for the company. Ms. Smith leads the executive team - she serves as the CEO. Mr. Leblanc is the CFO of the company. They both have reputations of being strong businesspeople who invest heavily in corporate governance, corporate social responsibility, and strongly emphasize ethics in their day to day operations.
AgriEqis headquartered in Dorval. The company has operations all over North America through its multiple subsidiaries in Canada, United States and Mexico. Agriq purchases the materials and parts necessary for manufacturing the equipment from several supplier companies in Canada, and AgriEq has been doing business with them for many years. One of the supplier companies is owned by Philippe Leblanc, a brother of John Leblanc. The customers consist primarily of individuals and businesses who engage in farming. Transactions consist primarily of credit sales: customers usually purchase equipment and the warranty protection with it.
Last year AgriEg had a control weakness in their salary processing - the old accounting system did not properly record payments to employees. Per discussion with Mr. Leblanc, that issue was identified by the company's controller last year. Mr. Leblanc informed you that in August 2020 the company implemented major updates to its accounting system, and the new system now correctly records all the salary expenses.
Guidelines to calculate materiality:
3% to 7% of net income before taxes.
1% to 3% of total assets.
3% to 5% of shareholders' equity.
1% to 3% of revenue.
1% to 3% of expenses.
0.5 to 5% of gross profit.
1. From the elements of the case, propose and justify. an assessment of the acceptable audit risk for this client (HIGH / MODERATE-HIGH / MODERATE/ MODERATE-LOW / LOW)
2. Using the guidance and the financial statements above, propose and justify an assessment of the overall materiality level for the 2020 audit of Agrifq.
Use the following information to answer questions 1-3. You are a partner at ABC CPA, and you are auditing June 30,2020 financlal statements of AgriEq Inc. AgriEq is a manufacturer of agricultural equipment (tractors, large plows, etc.). This is the first year ABC CPA is auditing this company. In the past they were audted by OLD CPA: AgrEq decided to switch auditors because ABC CPA has more experience auditing manufacturing clients. Last year OLD CPA Issued an unmodilled opinion. When you communicated with Rebecca Black, the partner at OLD CPA who was in charge of the past audits for AgriEq, she incicated that the audit team always found a lot of errors in accounting each year, but the CFO always booked all the adjustments as recommended by the auditors and never questioned them.Rebecca also told you that last year she had no disagreements with management, as well as no issues related to fraud. The company was founded by Ms. Jenny Smith and Mr. John Leblanc 10 years ago. The company is pitvate, and is owned by Jenny Smith, John Leblanc and five other partners, who are not wokking for the company. Ms. Smith leads the executive team - she serves as the CEO. Mr. Leblanc is the CFO of the company. They both have reputations of being strong businesspeople who invest heavily in corporate governance, corporate social responsibility, and strongly emphasize ethics in their day to day operations. AgriEqis headquartered in Dorval. The company has operations all over North America through its multiple subsidiaries in Canada, United States and Mexico. AgriEq purchases the materiais and parts necessary for manutactuing the equipment from several supplier companies in Canada, and AgriEq has been doing business with them for many years. One of the suppler companies is owned by Philippe Leblanc, a brother of John Leblanc. The customers consist primarly of indliliduals and businesses who engage in tarming. Transactions consist primatly of credit sales: customers usually purchase equipment and the warranty protection with it. Last year AgriEq had a control weakness in their salary processing - the old accounting system did not properly record payments to employees. Per discussion with Mr. Leblanc, that issue was identified by the companys controller last year. Mr. Leblanc informed you that in August 2020 the company Implemented major updates to its accounting system, and the new system now correctly records all the salary expenses. Statement of Financial Position FY 2020 FY 2019 Cash 100150 Inventory 200150 Accounts Receivable 500450 PPE 15001400 Total Assets 23002150 Short term liabilities Long Term Liabilities Total Liabilities Statement of Comprehensive Income Revenues Cost of Sales Other Expenses Net Income 15002501500250320022017001280 Guidelines to calculate materiality: - 3% to 7% of net income before taxes. - 1% to 3% of total assets. - 3% to 5% of shareholders' equity. - 1% to 3% of revenue. - 1% to 3% of expenses. - 0.5 to 5% of gross profit. Using the guidance and the financial statements above, propose and justify, an assessment of the overall materiality level for the 2020 audit of AgriEg, justify your choice(6 marks) Statement of Financial Position FY 2020 FY 2019 Cash 100150 Inventory 200150 Accounts Receivable 500450 PPE 15001400 Total Assets 23002150 Short term liabilities Long Term Liabilities Total Liabilities Statement of Comprehensive Income Revenues Cost of Sales Other Expenses Net Income 15002501500250320022017001280 Use the following information to answer questions 1-3. You are a partner at ABC CPA, and you are auditing June 30,2020 financlal statements of AgriEq Inc. AgriEq is a manufacturer of agricultural equipment (tractors, large plows, etc.). This is the first year ABC CPA is auditing this company. In the past they were audted by OLD CPA: AgrEq decided to switch auditors because ABC CPA has more experience auditing manufacturing clients. Last year OLD CPA Issued an unmodilled opinion. When you communicated with Rebecca Black, the partner at OLD CPA who was in charge of the past audits for AgriEq, she incicated that the audit team always found a lot of errors in accounting each year, but the CFO always booked all the adjustments as recommended by the auditors and never questioned them.Rebecca also told you that last year she had no disagreements with management, as well as no issues related to fraud. The company was founded by Ms. Jenny Smith and Mr. John Leblanc 10 years ago. The company is pitvate, and is owned by Jenny Smith, John Leblanc and five other partners, who are not wokking for the company. Ms. Smith leads the executive team - she serves as the CEO. Mr. Leblanc is the CFO of the company. They both have reputations of being strong businesspeople who invest heavily in corporate governance, corporate social responsibility, and strongly emphasize ethics in their day to day operations. AgriEqis headquartered in Dorval. The company has operations all over North America through its multiple subsidiaries in Canada, United States and Mexico. AgriEq purchases the materiais and parts necessary for manutactuing the equipment from several supplier companies in Canada, and AgriEq has been doing business with them for many years. One of the suppler companies is owned by Philippe Leblanc, a brother of John Leblanc. The customers consist primarly of indliliduals and businesses who engage in tarming. Transactions consist primatly of credit sales: customers usually purchase equipment and the warranty protection with it. Last year AgriEq had a control weakness in their salary processing - the old accounting system did not properly record payments to employees. Per discussion with Mr. Leblanc, that issue was identified by the companys controller last year. Mr. Leblanc informed you that in August 2020 the company Implemented major updates to its accounting system, and the new system now correctly records all the salary expenses. Statement of Financial Position FY 2020 FY 2019 Cash 100150 Inventory 200150 Accounts Receivable 500450 PPE 15001400 Total Assets 23002150 Short term liabilities Long Term Liabilities Total Liabilities Statement of Comprehensive Income Revenues Cost of Sales Other Expenses Net Income 15002501500250320022017001280 Guidelines to calculate materiality: - 3% to 7% of net income before taxes. - 1% to 3% of total assets. - 3% to 5% of shareholders' equity. - 1% to 3% of revenue. - 1% to 3% of expenses. - 0.5 to 5% of gross profit. Using the guidance and the financial statements above, propose and justify, an assessment of the overall materiality level for the 2020 audit of AgriEg, justify your choice(6 marks) Statement of Financial Position FY 2020 FY 2019 Cash 100150 Inventory 200150 Accounts Receivable 500450 PPE 15001400 Total Assets 23002150 Short term liabilities Long Term Liabilities Total Liabilities Statement of Comprehensive Income Revenues Cost of Sales Other Expenses Net Income 15002501500250320022017001280
