You work as an audit senior for a national CPA firm and have been assigned to audit the revenue cycle of the company's 2020 calendar year-end annual financial statements. You work out of the Las Vegas, Nevada, branch office and are very familiar with the manufacturing and the gaming industry. The audit client, KMHS Manufacturing Company Inc., has been an audit client of your firm for the last three years, but this will be the first year you have worked on the engagement. During the brainstorming session held prior to fieldwork, the audit partner noted that that the company was having financial difficulties due to reduced revenue as a result of a global pandemic. An emphasis was added to the audit for the team to carefully consider management override. KMHS began operations on January 1, 2005, in Las Vegas. The company is a nonpublicly traded, closely held S corporation with three shareholders: the CEO, who owns 40% of KMHS; the COO and general manager, who owns 35%; and the CFO, who owns 25%. The shareholders chose Las Vegas for the central location to casinos on the West Coast, low risk for natural disasters, and favorable gaming outlook by the banking industry. The three shareholders have 75 years' experience between them in the gaming industry. The shareholders invested $1.4 million into the company when it began operations (see the attached "Appendix C: Financial Statements"). There are no related party transactions. The company sales are classified under two groups: commercial customers and individual consumers. The company sells three products: casino chips (chips), dice, and playing cards (cards). Sales of chips, dice, and cards to commercial operations are conducted through KMHS's Sales Department. The company's final revenue stream is through slot machines (see the attached "Appendix A: Products, Sales, and Revenue" and "Appendix B: Customers, Warranties, Economic Conditions, and Accounts Receivable"). During 2005, KMHS negotiated a $1 million bank loan to cover development of casino chips. In addition, it negotiated a $1 million line of credit. During 2012, the company negotiated an additional bank loan to cover the production of slot machines. In 2019, the company then negotiated a consolidated loan to finance production costs for dice technology. The negotiated loan required KMHS shareholders to add additional capital to lower the debt-to-equity ratio to no greater than 0.8%. The bank loans are collateralized by all the assets of the company and are guaranteed individually by the shareholders. Average interest rates for 2020, 2019, and 2018 were 6.0%, 6.0%, and 4.5%, respectively.

REQUIREMENTS

Your submission must be your original work. No more than a combined total of 30% of the submission and no more than a 10% match to any one individual source can be directly quoted or closely paraphrased from sources, even if cited correctly. The similarity report that is provided when you submit your task can be used as a guide. You must use the rubric to direct the creation of your submission because it provides detailed criteria that will be used to evaluate your work. Each requirement below may be evaluated by more than one rubric aspect. The rubric aspect titles may contain hyperlinks to relevant portions of the course. Tasks may not be submitted as cloud links, such as links to Google Docs, Google Slides, OneDrive, etc., unless specified in the task requirements. All other submissions must be file types that are uploaded and submitted as attachments (e.g., .docx, .pdf, .ppt). Note: Format your submission document according to the requirement and rubric aspects, including the letter and number for each response (A, B, C3, for example).

A. Describe the purpose of the audit risk model and explain the relationship between each component.

Use the scenario and the attached Appendixes A-F to complete the following:

B. Assess the engagement risk (auditor business risk) at high or low, based off the attached "Appendix D: Client Business Risks." Justify your response using three or more aspects from Appendix D.

C. Address the following risks related to the revenue cycle:

1. Assess inherent risk for the revenue cycle at high or low. Justify your response using threeor more aspects from the attached "Appendix E: Inherent RisksRevenue and Accounts Receivable."

2. Assess control risk for the revenue cycle at high or low. Justify your response using threeor more aspects from the attached "Appendix F: Control Risks and Internal Controls Walkthrough."

3. Determine whether the risk of material misstatement is high, moderate, or low based on your response in parts C1 and C2. Justify your response.

4. Set and interpret the desired level of audit risk at 1% or 5%, based off your response in part C3.

5. Determine whether the detection risk is high, moderate, or low based off your responses in parts C3 and C4. Justify your response.

D. Based off your responses in parts C1-C5, determine an approach to obtaining audit evidence for each of the following assertions, including the percentage of tests of details, analytical procedures, and tests of controls. Justify your responses using the attached "Appendix F: Control Risks and Internal Control Walkthrough":

1. existence/occurrence

2. completeness

3. valuation

E. Acknowledge sources, using APA-formatted in-text citations and references, for content that is quoted, paraphrased, or summarized.

F. Demonstrate professional communication in the content and presentation of your submission.

File Restrictions

File name may contain only letters, numbers, spaces, and these symbols: ! - _ . * ' ( ) File size limit: 200 MB File types allowed: doc, docx, rtf, xls, xlsx, ppt, pptx, odt, pdf, txt, qt, mov, mpg, avi, mp3, wav, mp4, wma, flv, asf, mpeg, wmv, m4v, svg, tif, tiff, jpeg, jpg, gif, png, zip, rar, tar, 7z

RUBRIC

A:AUDIT RISK MODEL

NOT EVIDENT The submission provides neither the purpose of the audit risk model nor the relationships between the components.

APPROACHING COMPETENCE The submission does not accurately describe the purpose of the audit risk model. Or it does not accurately explain the relationship between 1 or more of the components: inherent risk, control risk, detection risk, or audit risk.

COMPETENT The submission accurately describes the purpose of the audit risk model and accurately explains the relationship between each component: inherent risk, control risk, detection risk, and audit risk.

B:ENGAGEMENT RISK

NOT EVIDENT The submission does not justify the assessment of the engagement risk (auditor business risk) at high or low.

APPROACHING COMPETENCE The submission does not sufficiently justify the assessment of the engagement risk (auditor business risk) at high or low by explaining how 3 or more aspects from Appendix D apply to the scenario and Appendixes A-C.

COMPETENT The submission sufficiently justifies the assessment of the engagement risk (auditor business risk) at high or low, by explaining how 3 or more aspects from Appendix D apply to the scenario and Appendixes A-C.

C1:INHERENT RISK

NOT EVIDENT The submission does not justify the assessment of inherent risk for the revenue cycle at high or low.

APPROACHING COMPETENCE The submission does not sufficiently justify the assessment of the inherent risk for the revenue cycle at high or low by explaining how 3 or more aspects from Appendix E apply to the scenario and Appendixes A-C.

COMPETENT The submission sufficiently justifies the assessment of the inherent risk for the revenue cycle at high or low by explaining how 3 or more aspects from Appendix E apply to the scenario and Appendixes A-C.

C2:CONTROL RISK

NOT EVIDENT The submission does not justify the assessment of control risk for the revenue cycle at high or low.

APPROACHING COMPETENCE The submission does not sufficiently justify the assessment of the control risk for the revenue cycle at high or low by explaining how 3 or more aspects from Appendix F apply to the scenario and Appendixes A-C.

COMPETENT The submission sufficiently justifies the assessment of the control risk for the revenue cycle at high or low by explaining how 3 or more aspects from Appendix F apply to the scenario and Appendixes A-C.

C3:RISK OF MATERIAL MISSTATEMENT

NOT EVIDENT The submission does not justify if the determination of the risk of material misstatement is high, moderate, or low.

APPROACHING COMPETENCE The submission does not accurately explain how assessments made in both parts C1 and C2 justify whether the determination of the risk of material misstatement is high, moderate, or low.

COMPETENT The submission accurately explains how the assessments made in both parts C1 and C2 justify whether the determination of material misstatement is high, moderate, or low.

C4:DESIRED LEVEL OF AUDIT RISK

NOT EVIDENT The submission neither sets the audit risk at 1% or 5%, nor interprets the desired level of audit risk.

APPROACHING COMPETENCE The submission does not set the desired level of audit risk at 1% or 5%. Or it does not interpret the desired level of audit risk based off the response in part C3.

COMPETENT The submission sets the desired level of audit risk at 1% or 5% and accurately interprets the desired level of audit risk based off the response in part C3.

C5:DETECTION RISK

NOT EVIDENT The submission does not provide a justification of whether the determination of detection risk is high, moderate, or low.

APPROACHING COMPETENCE The submission does not accurately explain how the assessments made in both parts C3 and C4 justify whether the determination of detection risk is high, moderate, or low.

COMPETENT The submission accurately explains how the assessments made in both parts C3 and C4 justify whether the determination of detection risk is high, moderate, or low.

D1:EXISTENCE/OCCURRENCE ASSERTION

NOT EVIDENT The submission neither determines an approach to obtain audit evidence for the existence/occurrence assertion nor justifies the determination by using Appendix F.

APPROACHING COMPETENCE The submission does not determine an approach to obtain audit evidence for the existence/occurrence assertion by including the percentage of tests of details, analytical procedures, or tests of controls. Or the submission does not justify the determination by using Appendix F.

COMPETENT The submission determines an approach to obtain audit evidence for the existence/occurrence assertion by including the percentage of tests of details, analytical procedures, and tests of controls. The submission justifies the determination by using Appendix F.

D2:COMPLETENESS ASSERTION

NOT EVIDENT The submission neither determines an approach to obtain audit evidence for the completeness assertion nor justifies the determination by using Appendix F.

APPROACHING COMPETENCE The submission does not determine an approach to obtain audit evidence for the completeness assertion by including the percentage of tests of details, analytical procedures, or tests of controls. Or the submission does not justify the determination by using Appendix F.

COMPETENT The submission determines an approach to obtain audit evidence for the completeness assertion by including the percentage of tests of details, analytical procedures, and tests of controls. The submission justifies the determination by using Appendix F.

D3:VALUATION ASSERTION

NOT EVIDENT The submission neither determines an approach to obtain audit evidence for the valuation assertion nor justifies the determination by using Appendix F.

APPROACHING COMPETENCE The submission does not determine an approach to obtain audit evidence for the valuation assertion by including the percentage of tests of details, analytical procedures, or tests of controls. Or the submission does not justify the determination by using Appendix F.

COMPETENT The submission determines an approach to obtain audit evidence for the valuation assertion by including the percentage of tests of details, analytical procedures, and tests of controls. The submission justifies the determination by using Appendix F.

E:APA SOURCES

NOT EVIDENT The submission does not include in-text citations and references according to APA style for content that is quoted, paraphrased, or summarized.

APPROACHING COMPETENCE The submission includes in-text citations and references for content that is quoted, paraphrased, or summarized but does not demonstrate a consistent application of APA style.

COMPETENT The submission includes in-text citations and references for content that is quoted, paraphrased, or summarized and demonstrates a consistent application of APA style.

F:PROFESSIONAL COMMUNICATION

NOT EVIDENT Content is unstructured, is disjointed, or contains pervasive errors in mechanics, usage, or grammar. Vocabulary or tone is unprofessional or distracts from the topic.

APPROACHING COMPETENCE Content is poorly organized, is difficult to follow, or contains errors in mechanics, usage, or grammar that cause confusion. Terminology is misused or ineffective.

COMPETENT Content reflects attention to detail, is organized, and focuses on the main ideas as prescribed in the task or chosen by the candidate. Terminology is pertinent, is used correctly, and effectively conveys the intended meaning. Mechanics, usage, and grammar promote accurate interpretation and understanding.