To: Audit Team
From: Colin Beck
Date: November 15th, 2012
After reviewing your work, I’ve identified issues that need to be changed before an audit opinion is issued.
Materiality
I believe we need revisit our materiality calculation. I agree with the basis being total assets due to their ownership structure. They rely heavily on debt rather equity for financing; therefore, they may put more emphasis on acquiring assets than earnings. However, I don’t agree with the percentage used, and there is no support to the selection of 5%. This calculation is crucial in determining the nature, timing, and extent of our testing. I recommend that we either find support for the 5%, or find another supported percentage to use for calculating materiality.
Control Testing
The reasoning for our amount of control testing doesn’t match CAS. Tests of control and substantive procedures are kind of an inverse relationship. According to CAS 330, a combination of control testing and substantive procedures must be used based on the risk assessment. When control risk is high, we will primarily rely on substantive procedures to obtain audit evidence. Inversely, we will rely primarily on tests of controls when control risk is low. As well, when control risk is moderate, we will use a combination of the two to produce audit evidence. We should change our control and substantive testing to match this basis.
I am concerned that zero control testing was performed during this audit. This area should not be ignored, and testing should be performed. We can assess the control risk as low since we installed it, therefore, I agree with reduced substantive tests. However, that means we should rely primarily on control testing in this scenario as well. I recommend that more control testing is performed for inventory.
Fraud Risk Assessment
Although we are familiar with the Juiced!, we cannot overlook this part of the audit. CAS 315 states that a fraud risk should be assessed for every audit. This will help us determine the nature, extent, and timing of our audit procedures, and crucial in determining the risk of a material misstatement. By ignoring this part of the audit, we are exposing ourselves to a familiarity threat as well. We need to maintain our professional skepticism and exercise due care throughout the audit. I recommend that we perform a fraud risk assessment.
Accounts Receivable
You have not heard, but today Power Fitness has gone bankrupt. Juiced! has a material balance outstanding in their receivables, and no provision has been recorded for this amount. Since this is a subsequent event, we make an adjustment for this outstanding balance.
According to CAS 560, he following we need to be performed before an adjustment is made:
(a) Discuss the matter with management and, where appropriate, those charged with governance;
(b) Determine whether the financial statements need amendment; and, if so,
(c) Inquire how management intends to address the matter in the financial statements.
Once