You work for the public accounting (audit) firm of Teper and Lubetsky.You have been approached by Auyung Inc. to be its auditor for the 2019 fiscal year.Auyung 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 Auyung 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 company's 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 company's financial system.

Required:

a)Using the draft 2019 financial statements, evaluate Auyung Inc.'s:

i.Liquidity by calculating the 2019 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.The collectability of the 2019 net Accounts Receivable using 2018 as a reasonable basis.

b)Propose and justify a dollar amount for Materiality for this 2019 audit of Auyung 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

Note:

Current Ratio = Current Assets / Current Liabilities

Quick Ratio = (Cash + Net Receivables) / Current Liabilities

Balance Sheet Auyung Inc. Income Statement Auyung Inc. in S As at Dec. 31, in For the Year ended 2019 2018 Dec. 31, 2019 ASSETS: Net Sales 2,486,000 Current Assets: Cost of Goods Sold 1,523,000 Cash 144,000 138,000 Accounts Receivable (Gross) 126,000 105,000 Gross Profit 963,000 less Allowance for Doubtful Accounts (2,000) (5,000) Operating Expenses: Inventory 246,000 265,000 Administrative Expenses 310,000 Total Current Assets 514,000 503,000 Other Operating Expenses 463,000 Depreciation, Buildings 5,000 Non-Current Liabilities Land 100,000 100,000 Total Operating Expenses 778,000 Buidings (net of Accum. Depr.) 1,070,000 1,075,000 Total Non-Current Assets 1,170,000 1,175,000 Operating Profit 185,000 TOTAL ASSETS 1,684,000 1, 678,000 Income Tax Expense 74,000 Profit 111,000 LIABILITIES: Current Liabilities: Accounts Payable 245,000 272,000 Bonds Payable (current) 20,000 20,000 Total Current Liabilities 265,000 292,000 Non-Current Liabilities Bonds Payable 400,000 420,000 Total Non-Current Liabilities 400,000 420,000 TOTAL LIABILITIES 665,000 712,000 EQUITY: Common Shares 475,000 475,000 Retained Earnings 544,000 491,000 TOTAL EQUITY 1,019,000 966,000 TOTAL LIABILITIES & EQUITY 1,684,000 1, 678,000