You are an Audit Manager at Belbeck & Belbeck Chartered Accountants and are currently reviewing the audit planning section of the September 30, 2012, year-end financial statement audit working papers for the Midas Touch (Midas), a public company which owns and operates a gold mine located in the Northwest Territories. Midass Head Office is located in Toronto. As is standard in the mining industry, Midas operates in a capital-intensive and regulated market. You are anxious to get started with your file review given that this is a new audit client, and you are already behind schedule. On October 31, 2012, the engagement was accepted, and an engagement letter signed after Midas previous auditors were recently kicked out of the profession and can no longer conduct audits. Given the sensitivity of the engagement, you have instructed your team not to proceed with the execution phase of the audit until you have reviewed the teams audit plan and provided your feedback.

You start to drat your interim review comments based on the following information:

1.Not surprisingly, when your team tried to contact the previous auditors, they got no response. here was a note in the audit file that said, Due to the fact that we were engaged after the beginning of the clients fiscal year, we have relied on the unqualified opinion of the predecessor audit firm with respect to the opening balance sheet.

2.the financial statements show net book value of Midas property, plant, and equipment to be $50 million. Historically, Midas has always been extremely profitable. However, this year there was a lengthy strike at the plant, which took its toll. his year they had revenue of $175 million and a net income of $1 million. he audits team calculated the materiality to be $875,000, based on 1/2% of total revenue.

3. the planning notes state, Due to time constraints on the audit this year, we did not go to the mine site. A tour of the mine will be arranged for the summer when we have more time and in preparation for next years audit. In order to confirm the mines existence, we saw pictures of it on the Companys website.

4.For the risk assessment, there was a note in the file which said, No formal risk assessment was performed. his is deemed a high-risk engagement.

5.Internal controls were relied upon in most areas. A note to the audit file said, Since the internal auditor departments sole mandate is to review and assess internal controls for all major business functions, based on our review of all internal audit reports issued this year, we are satisfied that controls can be relied upon.

6.the file indicates that there has been a significant change in the way Midas paid their vendors this year. On February 1, they implemented a policy whereby no cheques are to be issued and all vendor payments are to be made and customer payments are to be received via electronic funds transfers (EFTs). On that date, an application was launched whereby the EFT payments would be directly linked to the general ledger, thereby eliminating the manual entries that had to be made from the cash disbursements journal in the past. Five employees were terminated with full severance, due to this change in process. the launch of the software had its problems. Currently there is only one password that works. All employees, including the manager, have to use this password to log into the system. Multiple users can sign in using this password at the same time, another glitch in the system. he notes to the file says, Due to the above, we are not relying on internal controls for cash disbursements.

7. During the review of the minutes from the Board of Directors meetings during the year, the audit team discovered that the Board approved a significant increase to the presidents salary this year. In fact, based on your experience, you feel that his salary is much greater than compensation of presidents of other mining companies of comparable size and is clearly excessive and material. here is a note in the file which states that the method of computing the presidents salary was changed for the year under audit. In previous years the presidents salary was consistently based on net income while this year it was based on gross profit. Upon further review you discover that it is the presidents salary and not the strike that has siphoned of much of the income this year. You remember that the president is a substantial shareholder and Chairman of the Board of Directors.

8. the audit team also concluded that corporate governance was adequate based on the following note: Corporate management has high integrity, and the Chairman of the Board is actively involved in all aspects of the business. they also have a code of conduct. While there is little monitoring of compliance by employees, discussions with management have indicated that there has never been a fraud since the policy was implemented and they feel it was successful. Corporate governance is strong at Midas.

Identify and explain all the audit risks and provide suitable recommendations.