Your firm has been engaged to do the current years audit of Dawood Ltd., a medium-sized business involved in manufacturing television screens and computer monitors. Dawood is privately owned, and its two shareholders have requested that the annual financial statements be audited for the first time this year. One of the shareholders manages the business; the other is not involved. You are reviewing Dawoods preliminary general ledger trial balance, shown below, to begin the audit planning.

ACCOUNT BALANCE DR/(CR)

Cash 10,009

Accounts Receivable 167,090

Allowance for Bad Debts (25,000)

Inventory, Finished Goods 200,550

Inventory, Work-In-Progress 94,601

Inventory, Purchased Components 199,800

Inventory, Parts 34,400

Property, Plant & Equipment (PPE) 9,700,100

Accumulated amortization, PPE (3,607,597)

Accounts Payable (222,400)

Warranty Provision (87,000)

Bank Loan, Long-Term (1,000,000)

Share Capital, Common Shares (1,500,000)

Retained Earnings (1,738,442)

Revenue (9,005,800)

Cost of Goods Sold 4,696,600

General and Admin Expenses 1,902,500

Other Expenses 180,589

REQUIRED

a. When planning this audit, explain why it is important for Dawoods auditor to understand its business, its environment, and its risks.

b. Determine an appropriate materiality level for preliminary audit planning purposes. Explain your reasons for selecting this materiality level.

c. List two analytical procedures you could perform using the trial balance data above. Explain what each procedure can tell you about the risks in Dawoods financial statements and what further investigation the analytical results may suggest.

d. Identify two accounts that you feel would have the highest risk of material misstatement and two that you think would have the lowest. Explain the reasons for your risk assessments.