Reference no: EM133125919
Question - You are a senior associate at ABC CPA and have been assigned to the audit of December 31, 2021 financial statements of SellTech Inc. This is the first time ABC, CPA is going to work with this company. The prior year's audit was performed by OLD CPA.
The company is a private company that was founded by Ms. Jenny Smith 10 years ago. It is owned by Ms. Smith and John Leblanc. The company has no external investors. Ms. Smith leads the executive team - she serves as the CEO. Mr. Leblanc is the CFO of the company and has been with the company since the start.
SellTech is a distributer of electronics. The company purchases electronics from several manufacturers and resells it to its customers. SellTech has been doing business with its suppliers for many years. SellTech is headquartered in Dorval. One of the supplier companies is owned by Philippe Leblanc, a brother of John Leblanc. Transactions consist primarily of credit sales: customers usually purchase equipment and the warranty protection with it. The company has operations all over Canada, but so far has not been selling to any other countries.
In 2021 in addition to selling electronics they also started providing online tech support for cloud-based software. While the company invested a lot of funds in this new service, they are struggling to generate much revenue from it, because of tough competition in the market.
When you communicated with Rebecca Black, the partner at OLD CPA who was in charge of the past audits for SellTech, she indicated that that accounting at the company was done very well, there were very few errors uncovered, and they were all quickly fixed by the CFO, who seemed overall very interested in making sure that accounting was done correctly. The company did not have very strong controls over financial reporting, but the accounting department was very knowledgeable, which is the main reason for having almost no errors in the past.
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Statement of Financial Position
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2021
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2020
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Cash
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100
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150
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Inventory
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200
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150
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Accounts Receivable
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320
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450
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PPE
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20
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20
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Total Assets
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640
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770
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Short term liabilities
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150
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130
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Long Term Liabilities
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800
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720
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Total Liabilities
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950
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850
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Statement of Comprehensive Income
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|
Revenues
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350
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500
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Cost of Sales
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-150
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-220
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Other Expenses
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-700
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-250
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Net Income
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-500
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30
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Guidelines to calculate materiality:
- 3% to 7% of net income before taxes.
- 1% to 3% of total assets.
- 3% to 5% of shareholders' equity.
- 1% to 3% of revenue.
- 1% to 3% of expenses.
- 0.5 to 5% of gross profit.
Required -
1) Using the guidance and the financial statements above, propose and justify an assessment of the overall materiality level for the 2021 audit of this client.
2) From the elements of the case, propose and justify an assessment of inherent risk for this client (HIGH / MODERATE-HIGH / MODERATE / MODERATE -LOW / LOW) based on identifying and assessing only the two factors from RMM at the assertion level: the "subjectivity" and the "change" inherent risk factors (in other words, you do not need to assess the risks impacting the financials overall or any other factors).
3) What is going to be the planned detection risk (HIGH / MODERATE-HIGH / MODERATE / MODERATE -LOW / LOW) and the quantity of evidence auditors will have to collect for the audit of this client?