RSM323-Zhu Mei-Assignment 2

RSM323-Zhu Mei-Assignment 2 - Student Name: Mei Zhu Student...

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Student Name: Mei Zhu Student Number: 995984001 UTORid: Zhu Mei To: From: CA/CGA/CMA, External Auditor Re: Audit planning memo of CHI Bias: CHI has been experiencing great success in operation over the last two years. It is continuing doing great on the third coming year. The CEO of the company (Helen Scali) is planning to make CHI a public company this coming fall. As a result, CHI will try to maximize the attractiveness of the Financial Statements to investors. There are several reasons contributed to this judgment: 1. The CFO of CHI at that time, Allison Ling, was investigated by OSC for fraud. This issue is brought up by partner Gord during the performance of client acceptance procedures, not CHI Company itself. CFO Allison’s employment is terminated on October, 1, 2010, after the June 2009 financial statements being prepared. As a result, it is reasonable to suspect that the financial statements are misrepresented during preparation. 2. CHI stated that their inventory working papers from both 2008 and 2009 had been misplaced and could not been provided. As a result, there is no evidence to prove cost of sales, beginning and ending inventory levels are true. It is reasonable to believe CHI overestimated its sales revenue, underestimated its cost of sales, and overestimated its gross profit. 3. It says that “CHI has been experiencing rapid growth over the last two years, through a combination of acquisitions and increased presence in the market place.” “Much of the change in revenues over the last two years is a result of CHI’s acquisition of other companies.” However those purchase price allocation working papers showing original acquisition price are missing. Without original purchasing document, CHI can’t prove change in revenue through acquisition during the past two years is true. In addition, CHI is on track to more than double revenues in 2010. 4. In a conclusion, it is very reasonable to believe CHI’s bias to overstate results. Audit Planning Memo Risk of Material Misstatement The risk of material misstatement is high because: The CFO of CHI was being investigated for fraud during the period of CHI’s rapid growth. (High control risk)
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Student Name: Mei Zhu Student Number: 995984001 UTORid: Zhu Mei The financial statements of CHI have never being audited in the past. Internal annual consolidated financial statements for June 30, 2010 have not been finalized. Another auditing firm was engaged to provide a report with less assurance than audit. There is a bias for CHI’s management to overstate revenues and incomes in
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This note was uploaded on 05/09/2011 for the course RSM 323 taught by Professor Lisaharvey during the Spring '11 term at University of Toronto- Toronto.

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RSM323-Zhu Mei-Assignment 2 - Student Name: Mei Zhu Student...

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