Task 2
Task 2
Task 2
To: Mr Sheridan
Managing Director
Sheridan Audio Visual Ltd
Dear Mr Sheridan
You have requested that we audit the financial statements of Sheridan Audio Visual Ltd, which
comprises the statement of comprehensive income and statement of financial position as at
December 31, 2020. We are pleased to confirm our acceptance and our understanding of this audit
engagement by means of this letter. Our audit will be conducted with the objective of our expressing
an opinion on the financial statements.
We will conduct our audit in accordance with International Standards on Auditing (ISAs).These standards
require that we comply with ethical requirements and plan and perform the audit to obtain reasonable
assurance about whether the financial report is free from material misstatement. An audit involves
performing procedures to obtain audit evidence about the amounts and disclosures in the financial
report. The procedures selected depend on the auditor’s judgment, including the assessment of the
risks of material misstatement of the financial report, whether due to fraud or error. An audit also
includes evaluating the appropriateness of accounting policies used and the reasonableness of
accounting estimates made by management, as well as evaluating the overall presentation of the
financial report.
Based on the inherent limitations of an audit, together with the inherent limitations of internal control,
there is an unavoidable risk that some material misstatement may not be detected, even though the
audit is properly planned and performed in accordance with International Standards on Auditing
(ISAs).
In making our risk assessments, we consider internal control relevant to the entity’s preparation of the
financial statements in order to design audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control.
However, we will communicate to you in writing concerning any significant deficiencies in internal
control relevant to the audit of the financial report that we have identified during the audit.
1. For the preparation and fair presentation of the financial statements in accordance with the
International Financial Reporting Standards
2. For such internal control as management determines is necessary to enable the preparation of
the financial statements that are free from material misstatement, whether due to fraud or
error; and
3. To provide us with:
I. Access to all information of which the directors and management are aware that is relevant to
the preparation of the financial report such as records, documentation and other matters;
II.Additional information that we may request from the directors and management for the
purpose of the audit; and
III.Unrestricted access to persons within the entity from whom we determine it necessary to
obtain audit evidence.
As part of our audit process, we will request from management, written confirmation concerning
representations made to us in connection with the audit.
We look forward to full cooperation from your staff during our audit.
Please sign and return the attached copy of this letter to indicate your acknowledgement of, and
agreement with, the arrangements for our audit of the financial statements including our respective
responsibilities.
Alex Gold
Draft Notes about the General Economic Conditions of Sheridan Av Ltd
(Information was obtained from interviews with the Managing Director and other staff and minutes of
directors’ meetings)
Risk Factors relating to industry conditions Consider if this presents a risk and if so
consider how this will be addressed
New accounting, statutory, or regulatory Not present a risk
requirements that could impair the financial
stability or profitability of the entity
High degree of competition or market saturation, Listen to employees’ voice when they notice or
accompanied by declining margins become aware of a trouble that could result to
company’s catastrophe.
Declining industry with increasing business Not present a risk
failures and significant decline in customer
demand
Rapid change in the industry, such as high Yes. Adapt to the new economic world where
vulnerability to rapidly changing technology or technology is more rampant.
rapid product obsolescence
Risk Factors relating to operating characteristics Consider if this presents a risk and if so
and financial stability consider how this will be addressed
Inability to generate cash flows from operations Not present a risk
while reporting earnings and earnings growth
Significant pressure to obtain additional funds to Yes. Warehouse purchases P750,000 and loan
finance for example expansion required P450,000
Significant related party transactions not in the Not present a risk
ordinary course of business or with related
entities not audited or audited by another firm
Unusually rapid growth or profitability, especially Yes. 9months revenue 5.4 million is already
compared with that of other companies in the over the total last year sales 4 estimated total
industry sale growth is over 50% this year.
Unrealistically aggressive sales or profitability Yes. Sheridan AV hired and feature a football
incentive programmes stars for their advertising and promotion
campaign.
Threat of imminent bankruptcy or foreclosure, or Not present a risk
hostile takeover
Risk Factors relating to management Consider if this presents a risk and if so
consider how this will be addressed
A significant portion of management’s Yes. Bonus scheme for Emily, David and Leanne
compensation is represented by bonuses, stock
options or other incentives, the value of which is
contingent upon the entity achieving unduly
aggressive targets for operating results, financial
position, or cash flow
Management setting unduly aggressive financial Not present a risk
targets and expectations for operating personnel
Management continuing to employ an ineffective Refrain from recruiting employees who don’t
accounting, information technology or internal know that much, instead hire employees or
audit staff audit staffs that are knowledgeable, qualified in
a certain job and responsible one.
Domineering management behaviour in dealing Not present a risk
with the auditor, especially involving attempts to
influence the scope of the auditor’s work
Formal or informal restrictions on the auditor NA
that inappropriately limit his or her access to
people or information or his or her ability to
communicate effectively with the board of
directors or audit committee
Risk Factors relating to susceptibility of assets to Consider if this presents a risk and if so
misappropriation consider how this will be addressed
Large amounts of cash on hand or processed Assess for any anomalies in the company’s
recording transactions in quarter and year end
in considerable detail.
Inventory characteristics, such as small size, high Inventory management should be done
value, or high demand efficiently and effectively.
CONTROL ENVIRONMENT
ORGANISATIONAL CONTROLS
Non-Current Assets
Tangible 2,021,339 66.16% 1,250,700 48.55%
TOTAL ASSETS 3,055,151 100% 2,575,979 100%
Current Liabilities
Non-current Liabilities 689,770 22.58% 798,564 31.00%
1,171,550 38.35% 658,854 25.58%
Equity
Called up share capital
Accumulated profits 100,000 3.27% 100,000 3.85%
1,093,831 35.80% 1,018,561 39.54%
TOTAL EQUITY AND
LIABILITIES 3,055,151 100% 2,575,979 100%
Determining Materiality Level
Auditors will choose different numbers within these ranges depending on the audit risk.
The level of audit risk is inverse proportional to the extent of materiality: The lesser the audit
risk, the greater the materiality level, and vice versa. Given the high audit risk, the auditor selects 0.5
percent of sales, 1% of total assets, 1% of gross profit, 2% of shareholders' equity, and 5% of net income
as the material threshold for detecting misstatements that could have a significant impact on the
financial statements as a whole.
As a result, any amount less than the materiality level is deemed immaterial.
Write a short document describing your assessment of risk in this audit and how this will
affect subsequent work.
Sheridan AV specializes in high-end audio visual systems. Market movements and uncertainty as a
result of changing consumer tastes affect its business. Decade after decade, Sheridan's inventory has
continued to rise. As a result of poor market conditions or new products from competitors, Sheridan
AV's sales may be adversely affected, and their inventory may become out-dated. Inventory will be
affected as if new products from competitors enter the market, inventory from Sheridan AV which can
be previously sold at X amount will have to be valued lower. In spite of the current recession in Spain
the company is still considering expanding there. There will be an impact on sales if the recession gets
worse. As a result, they will suffer because they are more of a luxury good than a necessity for the
majority of consumers. Moreover, categorizing and controlling workplace hazard is essential for a safe
and healthy workplace. You'll find a description of the company's appropriate business practices as well
as information on conflicts of interest, protocols, and ethical standards. Be familiar with the job's
responsibilities and procedures as well as its requirements. It is therefore necessary to hire or train
competent and trustworthy personnel to support an effective internal control system. As a result of
these factors, the inherent and residual risk is significant. Assuming everything goes according to plan,
it's possible that the areas for improvement will go unnoticed if the planning phase is carried out
without adequate documentation. They may succeed, but they will not be able to maintain their
leadership position. Fraud and mistakes are more likely to occur when employees are unaware of what's
going on within the company.