Question

It is August 2018. You are the manager on the audit of The Sophisticated Listener, Inc. (TSL) a company that until recently had operated a large retail store in Lindsay selling CDs and music accessories. George, the managing director and principal shareholder of TSI, has for some time held the view that the future of the retail trade lies in the potential offered by Internet shopping. Shortly after its year end, December 31, 2017, the company closed its retail store and rented premises on the outskirts of Lindsay from where the business is now run and Inventory is stored. All sales are now made through its website. Following a major investment in computer systems, all customer orders are processed electronically. When required, the company's sophisticated ordering system generates purchase requisitions that are transmitted electronically to its suppliers. TSL ships goods to customers by first class mail with the aim of fulfilling all customer orders within three days. At a recent lunch meeting with the audit partner, George explained his plans for the new business. The plans included laying off 13 staff members. This would leave TSL operating with a staff of four. He enthused that the lower costs of the new premises and the significantly lower staff levels required to run the business would contribute to profitability in the longer term. Sales so far have been encouraging. With an advertising campaign underway and linkages from a number of high-profile music websites under negotiation, he is hopeful that the financial statements will show a break-even position within two years. George has also explained that an Internet business joint venture agreement has been entered into with a prominent music magazine publisher. Under the terms of the agreement, "the auditors of TSL shall certify the commissions that may be payable between the two parties. The first of these reports will cover the period to December 31, 2018. A note of the meeting with George has been prepared by the audit partner and is included in the Appendix. Following the meeting, the audit partner has asked you to give some thought to the planning of the audit for the year to December 31, 2018, as the interim audit is due to commence shortly. In particular, he has asked that business and related audit risks be documented. He noted that as TSL intends to publish the financial information electronically, last year's engagement letter may need to be amended. He also wants you to respond to George's request for advice in relation to the assurance work on commission payments. With Required: a) Write a note for the audit file that evaluates the following: 1. The company's business risks ll. The related inherent risks b) Write a letter for the audit partner to send to George 1. Analyzing the nature of the assurance that your firm could provide in connection with the commissions payable under the joint venture agreement II. Explaining the contents that might be included in the report