You have been the auditor for Louie Low Ltd. (LL) for twelve years, including the audit for the current year ended December 31, 2020.BET is a public company listed on the TSX-V.LL sells equipment across North America and also installs and maintains the equipment it sells. LL had been the leader in its respective industry and controlled the market; however, in the last few years' new competitors entered the field. The following are some facts about LL and its industries and information that has been obtained from the preliminary analysis of unaudited financial statements prepared by management.

• Due to COVID-19 domestic and international travel to Las Vegas, Reno, and Atlantic City is down substantially. Sales of new equipment and repair and maintenance of the equipment for the last three-quarters of 2020has fallen to less than half what it was in 2019.
• The company has had some supply chain interruptions affecting the importing of equipment and parts due to a significant shut down of international shipping lanes resulting from a tanker getting stuck. The company was forced to use airlines to ship,more than tripling the freight cost.
• The company has reduced its administration expenses, including accounting staff, to reduce costs.The company terminated their controller of 15 years due to the cost-cutting measure and hired a new controller that had just become a CPA in 2019.
• During the year, the major shareholder of LL provided a $1,500,000 loan at 12% per annum due on demand, as the bank was reluctant to extend any additional financing to the company until it had reviewed its annual audited financial statements.The company had not been successful in obtaining additional financing from other sources. In order to get the financial statements to the bank as quick as possible, the president demanded that the auditor issue an unmodified opinion by the end of January 2021.
• The loan agreement with the shareholder included substantial stock options exercisable when the company obtains additional financing.The shareholder indicated that the deal is potentially very lucrative as the company's share price had suffered recently.He expected that with the distribution of the COVID-19 vaccines and the re-opening of tourism, the company would quickly obtain financing by April 2021.These events would result in the company's 2021 financial statements being better, sending the share price rocketing.The shareholder has requested that the 2020 financial statement not disclose the terms and conditions of the loan or the options.
• As the casinos in North America start opening with restrictions, LL saw an opportunity to generate some cash flow by selling older slot machines at a discount to help ensure all repayments on the outstanding loan and supplyers payments were made on time.It was decided to sell this old equipment at 10% below cost.
• The CFO and CEO had always been very cooperative, and previous year audits had found very few misstatements.However, the two executives were concerned that this might not be the case in the current year due to the new controller being somewhat overwhelmed.To produce quality financial statements, the CEO has asked the auditors to prepare financial statements for 2020.
• The Board of Directors met with the auditors and asked if the audit fee could be reduced.They proposed to pay a base fee and then increase the fee if the company was successful in obtaining new financing

The following is selected financial information:

December 31, 2020 December 31, 2019

Total Assets $6,958,750 $6,000,000

Inventory $1,145,750 $1,200,000

Total Debt $5,493,750 $4,500,000

Total Equity $1,465,000 $1,500,000

Total sales and service revenue $7,500,000 $12,500,000

Normalized net income before tax $(50,000) $1,000,000

Income after tax $(35,000) $700,000

a. Given the case facts, identify either1independence threat or prohibition.Explain why it is a threat or prohibition.Identify the steps that should be taken to either reduce the threat to an acceptable level or eliminate the prohibition

b. Identify the primary user andexplain why. Include in your answer what factor in the financial statements the user would use to make decisions for 2020.

c. Determine preliminary overall materiality based on the benchmark you feel is the most appropriateandstate the qualitative factors and reasoning for your choice.

d. Based on the information given,

i-Identify and describe3significant risks of material misstatement at either the overall financial statement level or the financial statement assertion level. DO NOT IDENTIFY AS JUST INHERENT OR CONTROL

ii-Explain whythis is a significant risk.

iii- For each risk identified at the financial statement assertion level, identify the specific account being affected as well as the assertion.For each risk identified at the overall financial statement level, explain how this overall risk affects the auditor's response.

e. Given the case facts, identify one factor that would potentially reduce audit risk for LL

f. Complete the vertical and horizontal analysis for inventory for the year ended December 31, 2020, compared to December 31, 2019.Based on this analysis and case facts, explain whether the difference is unusual and why. Indicate what assertion poses the biggest significant risk for inventory and indicate why. The thresholds for determining if any changes are significant are $10,000 and 12%.

g. Calculate the company's debt to equity ratio at December 31, 2020.Given that the company's debt to equity ratio at December 31, 2019 was 3, explain whether the change in the ratio indicates or supports a significant risk and why.If there is an indication of a significant risk identify whether the risk is at the assertion or overall entity level

h. Explain the2different audit approaches that the auditor can use to audit LL and indicate what the differences between the 2 methods are.Based on the case facts indicate the1 approach you would recommend and why