Question

Sunrise Solar Inc. (SSI) is a medium-size company that is developing solar energy systems for private residences and small businesses. It is privately owned, with the majority of the shares held by the company's president, Shu Mingfei. Started up two years ago, to date, it is mostly involved in research and development, but this year it completed its first customer sales and installation. Shu has engaged your firm to do the current year's audit because she plans to obtain $20 million in debt financing from outside investors to allow further commercilization of the SSI systems. You are now reviewing SSI's preliminary general ledger trial balance in order to begin preparing the audit planning.

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

Account Balance Dr/Cr

Cash $101,209

Accounts receivable 85,019

Allowance for bad debts (15,000)

Inventory, finished goods 900,550

Inventory, work-in-process 44,666

Inventory, raw material 67,890

Deferred development costs 34,445

Property, Plant, and Equipment 3,700,990

Accumulated amortization, PPE (901,108)

Patents, at cost 1,010,000

Accounts Payable (198,009)

Warranty provision (30,000)

Shareholder loan, non-interest bearing   (11,000,000)

Share capital, common shares (1,000)

Retained earnings 1,364,767

Revenue   (812,202)

Cost of goods sold 666,502

General & Administration expenses 1,002,500

Research & Development expenses 3,990,000

Other Expenses 89,990

a. Identify three factors that your firm should consider before agreeing to conduct the audit.

b. What economic and industry risks are affecting this business? How would these risks affect the company's financial statements and your overall audit strategy?

c. discuss users, qualitative characteristics, apply a range of at least three quantitative calculations and make a recommendation for planning materiality consistent with your qualitative discussion and key users.

Answer 1

A) Three factors that your firm should consider before agreeing to conduct the audit.

1) When the accounting records is not available, It is not acceptable to obtain a written represntative as this represents an ability to sufficient and appropriate audit evidence and if material would result in a modified audit report. Firm should keep accounting record before consider to conduct the audit

2) Result of previous audits and the need to maintain professional scepticism should be included in a audit strategy as opposed to an audit engagement letter. Before agreeing to conduct the audit firm must maintain records of all the previous data of conducted audit. Auditor will ask the previous audit report before proceeding for next fiscal year audit.

3)The major factor that are considered in selecting and retaining an auditor include the size of the audit firm, the status of ongoing engagements, the cost of the auditor firm service and the specialty of service the firm offers. Compatibility between the company and auditor, the references obtained about the auditor's prior work and a written proposal provided from the auditor firm outling how they intend to meet the organizations needs are also factors taken under consideration when selecting and retaining the external auditors.

B) Economic and industry risks are affecting this business

Business risk - Definition

Business risk are the factors that could prevent or hinder the achievement of firms goal and objectives

Busines Risk includes

1)Loss of customers

2)Increase of production cost

3)Cash Flow Problems

4) Decline of product demand

5)Increase in market competition

6) Decrease in profitability

7) Inadequate financing

8)Political and economic instability

9) High Financial Risk

10) Over Trading

Economic and Industry Risks

1) The effects of the economy and other macro economic factors

Firms operations are affected by the general economic and political situation in the world. The company is primarly affected by events which impact the market. A slower economy and political changes may create anxiety in the markets on which the company operates and thus affect demand of the company products

2) Prices of raw materials

Firms profitability will impact through changes of raw materials or prices of the raw material products. Changes of raw material prices will affect calculation of individual project.

3) Competition and price pressure

The competition situtation varies between the various geographic markets and within different product segments. Increases in competition will affect the business and its earnings.

C) Qualitative characteristics

In accounting the qualitative characteristics include relevance, reliability, comparability and consistency.

Apply a range of at least three quantitative calculation

i) Gross Margin Ratio

Revenue	812,202
Less : Cost of Good Sold	666,502
Gross Profit	145,700

Firms gross profit margin is 17.94 % on sales

ii) Current asset ratio

Current Asset

Cash 101,209

Account receivable 70019

Invenory 1,013,106

Current Asset = 1,184,334

Current Liablities

Accounts Payable 198,009

Warranty provision 30,000

Current Liabilities = 228,009

Current Asset Ratio = Current Asset / Current Liabilities

Current Asset Ratio = 1184334/228009

Current Asset Ratio = 5.19

As quatitative measures firm has better current assets ratio is 5.19 to run the operation smoothly

iii) Quick / Liquidity Asset Ratio

Cash 101,209

Account receivable 70019

Quick Asset = 171228

Current Liablities

Accounts Payable 198,009

Warranty provision 30,000

Current Liabilities = 228,009

Quick Asset Ratio = Quick Asset / Current Liabilities

Quick Asset Ratio = 171228/228009

Quick Asset Ratio = 0.75

As quatitative measures firm not having good liquidity Quick assets ratio is 0.75 Firms need to improve this ratio. Firm will be in risk with less liquidity.

Recommendation for planning materiality consistent with your qualitative discussion and key users.

Company need to set quality control department to check the raw material goods, process of work in progess and finished works. Quality products can give firms good reputation in the market which can create brand for the company. Planning materiality consistent purchaser need to determine alternative supplier in the market. If in case one supplier stopping supplying raw material so other supplier should avaible to supply. Company should not rely on only one supplier. If they do so it will effect firm production process which will impact company profitablity and earnings.

Regularly checking of incoming raw material and outgoing finished goods

Inventory management purchase manager should regulary check sufficient raw material is available in the store.