Sun-house Solar Inc. (SHS) is a medium-sized private company that is develops solar energy systems for sale and installation in private residences. It is privately owned, with the majority of the shares held by the company’s president, Yong Shu. SHS started up five years ago. Its first two years were mostly involved in research and development. Over the past three years, SHS has been very successful and its customer sales and installations have grown continuously. SHS’s main raw material is silicone, which it purchases on the world market so that it can keep a one-year supply on hand at its factory in Woodbridge, NS. It also has some purchase commitments for silicone at prices far above the current spot price, which it would only use if there was a huge increase in the price of silicone on the world market. Ms. Shu has engaged your audit firm to do the current year’s audit because she plans obtain $20 million in financing to allow further commercialization of the SHS systems. The plan is to turn SHS into a public company and issue shares on the Toronto Stock Exchange. Your firm has accepted the engagement and assigned you to prepare the audit plan. You have obtained the preliminary general ledger trial balance from the SHS chief financial officer. The CFO is a qualified professional accountant with 15-years experience as a financial officer in various public companies before joining SHS two years ago.

The following is a summary of the accounts that appear in this trial balance as at year-end:

Required:
a. Identify three factors your audit firm would have had to consider in order to decide to accept the SHS audit engagement for the current year, and explain how each factor affects the acceptance decision.
b. What materiality levels would you use for planning this audit? Show your calculations and justify your decisions.
You can assume your audit firm has the following policy for setting performance materiality: Performance materiality should be 70% of the materiality level for financial statements as a whole, unless specific information indicates a different value should be used.
c. What audit risk level would you want to achieve for this engagement? Describe your choice in terms of one of these levels: highest, medium, or lowest. Explain the factors that support your decision.
d. Identify and explain three business risk factors in SHS that you would need to understand in order to assess the risk of material misstatement in its financial statements. e. Based on the business risk analysis for SHS, your audit manager is concerned the SHS finished goods inventory account balance has high risks of material misstatement.
Your manager has asked you to assess the risk of material misstatement (RMM) at the assertion level for this account. Use the levels high, medium, or low to describe your assessments. Explain the factors that support your assessments.
f. Outline a substantive audit program that responds to the risks at the assertion level that you have assessed, above, for SHS’sinventory.

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ACCOUNT BALANCE DR/(CR) Allowance for bad debts Inventory, work-in-progress Inventory, unassembled solar panels Inventory, raw materials Property, plant and equipment Accumulated amortization, PPE Accounts payable Shareholder loan, non-interest-bearing Share capital, common shares General and administration expenses Research and development expenses 4