You work for the public accounting (audit) firm of Teper and Lubetsky LLP. You have been approached by Auyung Corp. to be its auditor for the 2020 fiscal year. Auyung Corp. 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 Corp.: ? 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 40 separate shareholders, and each shareholder relies heavily upon the audited financial statements to understand facts about their investment. In addition, there are 4 separate Insurance Companies which are holders of some of the company's Bonds (see Liabilities section of the Balance Sheet). Ensuring each of these stakeholders receives the audited financial statement to which they are entitled is a big job because of the large number of recipients. ? The company has a very predictable and repetitive set of transactions each month. All suppliers of inventory are within Canada and are paid in Canadian dollars, and therefore there is no complexity related foreign exchange transactions. 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 Auyung Corp.'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 1.5 : 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 Auyung Corp. (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 0.4% 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 Auyung Corp. Balance Sheet Auyung Corp. in $ As at Dec. 31, 2020 2019 ASSETS: Current Assets: Cash 252,000 249,000 Accounts Receivable (Gross) 126,000 105,000 less Allowance for Doubtful Accounts (4,000) (7,000) Inventory 222,000 241,000 Total Current Assets 596,000 588,000 Non-Current Assets Land 898,000 898,000 Buidings (net of Accum. Depr.) 900,000 1,000,000 Total Non-Current Assets 1,798,000 1,898,000 TOTAL ASSETS 2,394,000 2,486,000 LIABILITIES: Current Liabilities: Accounts Payable 350,000 470,000 Bonds Payable (current) 25,000 25,000 Total Current Liabilities 375,000 495,000 Non-Current Liabilities Bonds Payable 725,000 750,000 Total Non-Current Liabilities 725,000 750,000TOTAL LIABILITIES EQUITY: Common Shares Retained Earnings TOTAL EQUITY TOTAL LIABILITIES & EQUITY Income Statement in 5 Net Sales Cost of Goods Sold Gross Prot Operating Expenses: Administrative Expenses Other Operating Expenses Depreciation, Buildings Total Operating Expenses Operating Profit Income Tax Expense Profit 1,100,000 1,245,000 750,000 750,000 544,000 491,000 1,294,000 1,241,000 2,394,000 2,486,000 Auyung Corp. For the Year ended Dec. 31, 2020 2,102,000 1,2 19,000 883,000 254,000 4 12,000 100,000 776,000 107,000 42,800 64,200