You work for the public accounting (audit) firm of Teper and Lubetsky. You have been approached by Autio Inc. to be its auditor for the 2020 fiscal year. Autio Inc. is a medium sized company operating in Southern Ontario as a merchandise wholesaler, buying goods to sell to retailers. [For this assignment, ignore issues related to communication with prior auditors] You will review the draft financial statements found on the next page as you prepare for audit planning. In addition, upon an inquiry, you discover the following three facts about Autio Inc.: Company management maintains best-in-class business practices such as requiring all business agreements to be clearly documented (for example, with its many suppliers) and has never had even one dispute concerning payments to suppliers. Everyone in the industry is known to appreciate the high ethical standards of the management team. The company has two shareholders, and each of them is intimately knowledgeable of company financial and operating affairs. These two shareholders often speak directly to the Senior Management team. In fact, the holder of all of the companys Bonds (see Liabilities section of the Balance Sheet) is one of these two shareholders. The company continuously changes suppliers of its inventory, including the country of origin and currency of payment. The complexity of accounting for these foreign currency transactions is an inherent feature of the companys financial system. Required: a) Using the three facts discovered upon inquiry (see above), evaluate these facts and come to a decision as to whether Teper and Lubetsky should or should not accept the audit engagement. Justify your decision using the three facts and balancing the Pro and Con arguments. [10 marks] b) Assuming you accept the audit engagement, use the draft 2020 financial statements to evaluate Autio Inc.s: i. Liquidity by calculating the 2020 Current Ratio and Quick Ratio (also known as Acid Test) compared to the industry standard of a Current Ratio of 1.8 : 1 and Quick Ratio of 0.9 : 1. [5 marks] ii. Collectability of the 2020 net Accounts Receivable using 2019 as a reasonable basis. [5 marks] c) Propose and justify a dollar amount for Materiality for this 2020 audit of Autio Inc. (assumes you accept the engagement) using the following bases: i. Rule of Thumb of between 5% - 10% of Operating Profit (i.e. Pre-tax profit) ii. Industry standard of 0.6% of revenues [10 marks total for (c)] Note: Use the following definitions for the purposes of this assignment Current Ratio = Current Assets / Current Liabilities Quick Ratio or Acid Test = (Cash + Net Receivables) / Current Liabilities

Financial Statements for Autio Inc.

View Sign Window Help Tools Group1 GA1 ACCT... S 1004 Financial Statements for Autio Inc. Search Signature Balance Sheet in s 2. Export PDF Autio Inc. For the Year ended Dec 31, 2020 2,486,000 1,523,000 ASSETS: Current Assets Cash Accounts Receivable (Gross) less Allowance for Doubtful Accounts Inventory Total Current Assets Adobe Export PDF Convert PDF Files to Word or Excel Online 963.000 Autio Inc Income Statement As at Dec. 31, in $ 2020 2019 Net Sales Cost of Goods Sold 144,000 138,000 Gross Profit 126,000 105,000 (2000) (5,000) Operating Expenses 246,000 265,000 Administrative Expenses 514.000 503,000 Other Operating Expenses Depreciation Buildings 100,000 100,000 Total Operating Expenses 1.070,000 1,075,000 1,170,000 1,175,000 Operating Profit 1,684,000 1,678,000 Income Tax Expense Profit Select PDF File 110,000 463,000 5.000 Group GAL_r2021.pdf 278,000 Convert to Non-Current Assets Land Buidings (net of Accum. Der) Total Non-Current Assets 105,000 Microsoft Word doc) 74,000 TOTAL ASSETS 111,000 Document Language: English (US) Change LIABILITIES: Current Liabilities Accounts Payable Bonds Payable (current) Total Current Liabilities 245,000 20,000 265,000 272.000 20,000 292,000 Non-Current Liabilities Bonds Dayable Total Non-Current Liabilities 100,000 400,000 420,000 420,000 Edit PDF TOTAL LIABILITIES 665.000 712,000 EQUITY Comert odil ande sian Pol 475.000 S44,000 1,019.000 475,000 491,000 365.000 TOTAL EQUITY TOTAL LIABILITIES & EQUITY 1.6114,000 1.678.000 View Sign Window Help Tools Group1 GA1 ACCT... S 1004 Financial Statements for Autio Inc. Search Signature Balance Sheet in s 2. Export PDF Autio Inc. For the Year ended Dec 31, 2020 2,486,000 1,523,000 ASSETS: Current Assets Cash Accounts Receivable (Gross) less Allowance for Doubtful Accounts Inventory Total Current Assets Adobe Export PDF Convert PDF Files to Word or Excel Online 963.000 Autio Inc Income Statement As at Dec. 31, in $ 2020 2019 Net Sales Cost of Goods Sold 144,000 138,000 Gross Profit 126,000 105,000 (2000) (5,000) Operating Expenses 246,000 265,000 Administrative Expenses 514.000 503,000 Other Operating Expenses Depreciation Buildings 100,000 100,000 Total Operating Expenses 1.070,000 1,075,000 1,170,000 1,175,000 Operating Profit 1,684,000 1,678,000 Income Tax Expense Profit Select PDF File 110,000 463,000 5.000 Group GAL_r2021.pdf 278,000 Convert to Non-Current Assets Land Buidings (net of Accum. Der) Total Non-Current Assets 105,000 Microsoft Word doc) 74,000 TOTAL ASSETS 111,000 Document Language: English (US) Change LIABILITIES: Current Liabilities Accounts Payable Bonds Payable (current) Total Current Liabilities 245,000 20,000 265,000 272.000 20,000 292,000 Non-Current Liabilities Bonds Dayable Total Non-Current Liabilities 100,000 400,000 420,000 420,000 Edit PDF TOTAL LIABILITIES 665.000 712,000 EQUITY Comert odil ande sian Pol 475.000 S44,000 1,019.000 475,000 491,000 365.000 TOTAL EQUITY TOTAL LIABILITIES & EQUITY 1.6114,000 1.678.000