Reference no: EM133346969

Question: As a senior auditor at CPA LLP, you are beginning your first audit of Burnaby Ltd. for the fiscal year ended December 31, 2021. The engagement team consists of you, the engagement partner, and three junior auditors. Burnaby Ltd. is a retail firm that is publicly listed in the TSX (Toronto Stock Exchange). The company was previously audited by another public accounting firm. During the audit, the following scenarios are encountered. Please respond to the scenario below and summarize your response in a report.

In one of the meetings at the beginning of the audit, the audit team and the client's audit committee discussed the materiality and the overall audit plan. The audit committee proposed to set the planning materiality at $2,500,000. The unaudited financial statements show total assets at year-end of $250,000,000, revenues of $300,000,000, and income before taxes of $25,000,000. The audit team reviewed Burnaby's opening balance for various accounts. One exception was noted that the client had failed to record accounts payable for $300,000 of inventory items on December 31, 2020, which resulted in a $300,000 (before tax) overstatement of 2020 income. The client's audit committee suggest that the error could be ignored as it is not material and the error is self-correcting, given that the liability was paid in 2021. In addition, the audit committee suggests the audit team perform audit procedures to achieve 90% assurance that any material misstatements that existed in the financial statements would be detected. Please explain whether you agree or disagree with the decisions or judgements made by the audit committee.