Reference no: EM133157485
Question - You are considering the audit of Better Beauty (BB), a firm specialising in cosmetic surgery with around ten branches across Australian cities. The CEO of BB is Sid Red, who founded the company around 15 years ago and still owns the majority of shares. Sid believes that BB has outgrown its current auditor, who only has offices in Sydney, and is looking for a larger firm as a business partner as they want to list on the stock exchange in 3-5 years.
Your research on the firm reveals the following:
In recent years, BB has specialised in eye enlargements, referred to as "Anime eyes". This operation is heavily promoted by many Instagram influencers and has become extremely fashionable among 14-25-year-olds. It is so popular that 50% deposits (which are refundable) are taken as a booking fee, which can be up to six months before the operation is carried out.
Sid Red is somewhat of a celebrity, and is often photographed with his luxury cars and yachts. Sid is also a large donor to the charity "Second Chance", which helps convicted criminals find jobs after they have been released from jail. Sid has been quoted as saying "I'm an example of someone who turned their life around after prison".
In the last few months BB has hired Clara Kay, an ex-auditor from a Big 4 firm, to lead their finance team and begin preparations for their listing.
BB was recently the target of a special investigation by a current affairs program. The program interviewed several of BB's former clients, who alleged that the operations BB performed left them with significant health problems, including blindness. The program also featured a senior politician, who stated that: "better regulation of this industry is coming soon".
Required -
1. Based on the above information, list two factors that are relevant to assessing the integrity of BB. For each factor explain whether BB seems to have high or low levels of integrity.
2. In addition to the facts provided above, state one example of other information you would obtain in order to evaluate the integrity of BB.
3. Identify two business risks faced by BB. For each business risk, discuss how it might lead to a material misstatement of the financial report.
4. Identify one factor that would impact preliminary materiality, and explain whether it would increase or decrease preliminary materiality.