Identify risks at the overall F/S level

Identify risks at the overall F/S level


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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