Identify risks at the overall F/S level
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Overlook Video Stores Inc. (OVS) is a privately-held chain of DVD rental stores headquartered in Toronto. The company was incorporated in 1992 and has gone from a single store in Toronto to over 30 stores throughout Ontario. Harford & Harford, LLP (H&H), a mid-sized professional services firm, have been the auditors for OVS since its inception. You, CA, are the audit senior on the OVS audit for the year ending December 31, 2005. On December 1, 2005, Alice Harford, the engagement partner, calls you into her office to explain that the audit will need to begin in early January 2006, because OVS’s bank is eager to see the audited financial statements. “I would like you to prepare the audit planning memo for the OVS audit. OVS has experienced some changes, and I want to make sure we consider those in our audit plan. The controller of OVS has faxed us the interim financial statements for the 11 months ended November 30, 2005. Net income before taxes for the 11-month period is $5,547,000.These should help you in your audit plan. “I met with Victor Ziegler, the controlling shareholder of OVS, a few months ago and he told me about OVS’s new directions. Here are my notes from that meeting (Exhibit I). “I also met with OVS’s Chief Information Officer, Nick Nightingale. He provided a description of OVS’s expansion during 2005 into the Internet-based DVD rental market through a program called Movies By Mail. Here are my notes from my meeting with Nick (Exhibit II). Please review them and provide your recommendations for improving the system. I will pass on your comments to our Information Technology (IT) partner so that she can include them in a report she is preparing for Victor. Victor has asked our IT partner to meet with him to discuss the information technology issues related to the Internet-based rental system. Required: The engagement partner asks you to:
A. Identify risks at the overall F/S level (OFSL). Be sure to state what the risk is and why it is a risk (what + why).
B. Based on your risk assessment, consider what type of audit approach should be taken
C. Assess materiality for the engagement
D. Identify the account-specific risks. Be sure to state what the risk is and why it is a risk (what + why).
E. Develop procedures to test each risk. Consider using the VOOP acronym. F. Identify the control issues with the new IT system – be sure to identify the weakness, the implication and then provide a recommendation.
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