The purpose of this memorandum is to outline in sufficient detail the terms of the audit engagement. In planning the audit engagement for Toy Local Corporation for the year ended October 31, 2012. This memorandum has been arranged according to the envisioned audit strategy and is centered on collective audit data and practice. As well as important matters that address significant engagement issues, and particularly identifies matters applicable to the attention of the audit committee.
Business risk is one of the four critical components of risk involved in conducting an audit. It originates with the audit client and its environment; it is the risk that affects the operations and possible outcomes of organizational activities. The business risks identified in the Toy Local Company are the following:
The risk an auditor has when expressing an inappropriate audit opinion when the financial statements are materially misstated is considered to be audit risk.There are two ways an auditor can control this risk: First way is to completely avoid the audit risk by not accepting certain companies as clients, and second way is to set a low audit risk level and increase the amount of testing in order to lower the risk of failing to identify any material financial misstatements. The identified audit risks in TLC were the following:
Conclusion: Other risks involved are new product failure, doubling of management's bonus pool contributions depending on TLC's operating income gives management incentive to cook the books in order to meet certain numbers, and management competence.