Question

Sunrise Solar Inc. (SSI) is a medium-size company that is developing solar energy systems for private residences and small businesses. It is privately owned, with the majority of the shares held by the company's president, Shu Mingfei. Started up two years ago, to date, it is mostly involved in research and development, but this year it completed its first customer sales and installation. Shu has engaged your firm to do the current year's audit because she plans to obtain $20 million in debt financing from outside investors to allow further commercialization of the SSI systems. You are now reviewing SSI's preliminary general ledger trial balance in order to begin preparing the audit planning. The following is a summary of the accounts that appear in this trial balance as at year-end:

Cash $101,209

Accounts receivable 85,019

Allowance for bad debts (15,000)

Inventory, finished goods 900,550

Inventory, work in process 44,666

Inventory, raw material 67,890

Deferred development costs 34,445

Property, plant and equipment 3,700,990

Accumulated amortization, PPE (901,108)

Patents, at costs 1,010,000

Accounts payable (198,009)

Warranty provision (30,000)

Shareholder loan, non-interest bearing (11,000,000)

Share capital, common shares (1,000)

Retained earnings 1,364,767

Revenue (812,202)

Cost of goods sold 666,502

General and administration expenses 1,002,500

Research and development expenses 3,990,000

Other expenses 89,990

REQUIRED:

a.) Identify three factors that your firm should consider before agreeing to conduct the audit.

b.) What are the economic and industry risks affecting this business? How would these risks affect the company's financial statements and your overall audit strategy?

c.) Discuss users, qualitative characteristics. Apply a range of at least three quantitative calculations and make a recommendation for planning materiality consistent with your qualitative discussion and key users.