The following are various activities an auditor does during audit planning.
1. Review accounting principles unique to the client’s industry
2. Determine the likely users of the financial statements
3. Evaluate the appropriate financial statement measures for determining amounts
likely to be considered material by users of the financial statements
4. Identify whether any specialists are required for the engagement
5. Send an engagement letter to the client
6. Tour the client’s plant and offices
7. Specify materiality levels to be used in testing of accounts receivable
8. Compare key ratios for the company to those for industry competitors
9. Review management’s risk management controls and procedures
10. Identify potential related parties that may require disclosure
For each procedure, indicate which of the first four parts of audit planning the procedure primarily relates to (1) accept client and perform initial audit planning, (2) understand the client’s business and industry, (3) perform preliminary analytical procedures, (4) set preliminary judgment about materiality and performance materiality.
In your audit of Canyon Outdoor Provision Company’s financial statements, the following transactions came to your attention:
1. Canyon Outdoor’s operating lease for its main store is with MTS Properties, which is a real estate investment firm owned by Andrei Mikhailov. Mr. Mikhailov is a member of Canyon Outdoor’s board of directors.
2. One of Canyon Outdoor’s main suppliers for kayaks is Hessel Boating Company. Canyon Outdoor has purchased kayaks and canoes from Hessel for the last 25 years under a long-term contract arrangement.
3. Short-term financing lines of credit are provided by Cameron Bank and Trust. Suzanne Strayhorn is the lending officer assigned to the Canyon Outdoor account. Suzanne is the wife of the largest investor of Canyon Outdoor.
4. Hillsborough Travel partners with Canyon Outdoor to provide hiking and rafting adventure vacations. The owner of Hillsborough Travel lives in the same neighborhood as the CEO of Canyon Outdoor. They are acquaintances, but not close friends.
5. The board of directors consists of several individuals who own stock in Canyon Outdoor. At a recent board meeting, the board approved its annual dividend payable to shareholders effective June 1.
a. Define what constitutes a “related party.”
b. Which of the preceding transactions would most likely be considered a related party transaction?
c. What financial statement implications, if any, would each of the above transactions have for Canyon Outdoor?
d. What procedures might auditors consider to help them identify potential relatedparty transactions for clients like Canyon Outdoor?
Your audit firm was recently engaged to conduct the financial statement audit for BBH Automotive, an original equipment manufacturer (OEM) in the automotive industry. As the senior manager on the engagement, you are performing initial audit planning and developing an understanding of BBH’s business and industry. While the lead engagement partner has experience in the automotive industry, you have only worked on one other automotive engagement. As part of the planning process, you are reviewing news articles and thought papers on the impact of autonomous vehicles on the industry, including OEMs. You come across a 2017 publication by KPMG titled “Islands of Autonomy: How Autonomous Vehicles Will Emerge in Cities Around the World,” in which the authors predict that sales of personally owned sedan vehicles in the U.S. will drop from approximately 5.4 million in 2017 to 2.1 million by the year 2030 due to shifts in mobility patterns, particularly in major cities.
You are also aware that BBH Automotive recently had a significant recall on one of their parts that is a component of a popular sedan sold by one of the large automotive manufacturers. You read that a lawsuit has been filed related to an accident caused by the defective part.
a. Based on the information above, identify at least three business risks for BBH Automotive.
b. What impact could each of these business risks potentially have on the client’s financial statements, including footnote disclosures? Be specific in terms of the accounts and disclosures affected and in what way they would be affected.
c. You meet with the lead engagement partner and she asks you to provide a more in-depth assessment of the potential impact of autonomous vehicles on the automotive supplier market in preparation for a meeting with the CEO of BBH. Go to the KPMG website and access the “Islands of Autonomy” publication, or other publications from KPMG U.S. Manufacturing Institute’s Automotive Center about the future of the automotive indus- try, at www.kpmg.com/us/automotive. Identify at least two additional risks related to vehicles, and draft questions related to these business risks as well as the business risks identified in part a. above. You will ask BBH Automotive’s CEO about how the company plans to address these risks.
d. What are additional sources of information that you could use to identify additional
potential business risks?
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