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MEMORANDUM

TO: FROM: CC: DATE: RE: Norma Montague Graham Arrowood, Angus Gambill, Michael Huber, and Philip Rosenman Jack Wilkerson April 22, 2012 CarProof Audit and Business Risk Evaluation

Norma: Based on our analysis of CarProof, and its various encumberments, we have identified a number of audit and business risks that, we believe, should be considered. The audit risks we have identified include the following: While Management has a positive outlook on the lawsuit, it could be a biased opinion. The competitor indicated that they plan to fight the lawsuit, which is an inherent risk. CarProof has not yet applied any amortization to the deferred costs. Unless controls (control risk) are implemented, this could lead to timely material misstatement. CarProofs previous auditors resigned due to a disagreement on the valuation of deferred development costs for Run-Smooth

The business risks that we have identified include the following: As of late, CarProof has not received any significant orders, which makes their primary line of business a going concern CarProofs flagship product is expensive to produce, which will cause large amounts of up front expenses before any revenue can be collected CarProofs main competitor is already well-established, and the decision to carve out a niche market creates added difficulty in creating a solid customer base CarProof has had significant losses in the prior three years CarProof must pay royalties to Run-Smooth, further deteriorating margins and ability to turn a profit CarProof is building a new operating plant, but expansion should not be attempted when sales are virtually nonexistent, and the funds are simply not available CarProof has an outstanding loan of $3.514 million, which leverages all corporate assets and requires annual assessments of all blending facilities The $900,000 grant from the state government is based on certain employment levels that could influence management to falsify employment records There is also risk in the company issuing stock. This not a risk-averse solution to compensating cash flow problems.

We hold the contention that these risks must be further examined in order to determine if CarProof should be accepted as an audit client. If you would like further description of any of the above identified issues, please contact our team.
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