DRAFT AUDIT ENGAGEMENT LETTER

To: Mr Sheridan
Managing Director
Sheridan Audio Visual Ltd

Dear Mr Sheridan

The objective and scope of the audit

You have requested that we audit the financial statements of Sheridan Audio Visual Ltd, which
comprises the statement of comprehensive income and statement of financial position as at
December 31, 2020. We are pleased to confirm our acceptance and our understanding of this audit
engagement by means of this letter. Our audit will be conducted with the objective of our expressing
an opinion on the financial statements.

The responsibilities of the auditor

We will conduct our audit in accordance with International Standards on Auditing (ISAs).These standards
require that we comply with ethical requirements and plan and perform the audit to obtain reasonable
assurance about whether the financial report is free from material misstatement. An audit involves
performing procedures to obtain audit evidence about the amounts and disclosures in the financial
report. The procedures selected depend on the auditor’s judgment, including the assessment of the
risks of material misstatement of the financial report, whether due to fraud or error. An audit also
includes evaluating the appropriateness of accounting policies used and the reasonableness of
accounting estimates made by management, as well as evaluating the overall presentation of the
financial report.

Based on the inherent limitations of an audit, together with the inherent limitations of internal control,
there is an unavoidable risk that some material misstatement may not be detected, even though the
audit is properly planned and performed in accordance with International Standards on Auditing
(ISAs).

In making our risk assessments, we consider internal control relevant to the entity’s preparation of the
financial statements in order to design audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control.
However, we will communicate to you in writing concerning any significant deficiencies in internal
control relevant to the audit of the financial report that we have identified during the audit.

The responsibilities of management

Our audit will be conducted on the basis that management acknowledge and understand that they have
responsibility:

1. For the preparation and fair presentation of the financial statements in accordance with the
International Financial Reporting Standards
2. For such internal control as management determines is necessary to enable the preparation of
the financial statements that are free from material misstatement, whether due to fraud or
error; and
3. To provide us with:
I． Access to all information of which the directors and management are aware that is relevant to
the preparation of the financial report such as records, documentation and other matters;
II．Additional information that we may request from the directors and management for the
purpose of the audit; and
III．Unrestricted access to persons within the entity from whom we determine it necessary to
obtain audit evidence.

As part of our audit process, we will request from management, written confirmation concerning
representations made to us in connection with the audit.

We look forward to full cooperation from your staff during our audit.

Please sign and return the attached copy of this letter to indicate your acknowledgement of, and
agreement with, the arrangements for our audit of the financial statements including our respective
responsibilities.

Alex Gold
 Draft Notes about the General Economic Conditions of Sheridan Av Ltd

(Information was obtained from interviews with the Managing Director and other staff and minutes of
directors’ meetings)

 Sheridan AV in in the high-end Audio Visual business.

 David informed Graeme of the massive increase of revenue within the year in which they almost
double their turnover compared to 2020, which have prompted suspicions of possible fraud on
Graeme's part.
 They’ve increased the number of companies who buy from them and also increased the volume
of trade with each company due to the visits that Emily has made to their premises during the
year.
 They have intention to expand and grow throughout Europe, with a focus of Spain.
 Hired and feature a professional football stars for their advertising campaign.
 Warehouse purchases P750,000 and loan required P450,000
 Draft revenue was stated to 5.4million as of December 31
 When it comes to management’s side of things, according to the documented minutes, there
are most often minor problems in the following two sessions.
 Their medium in recording and keeping their data are the Spread sheets and Microsoft only
which means that it is really not that adequate in order for them to be really sure that the data
they input were correct and precise.
 Economic values of a company must be constantly supervised to detect any impairments or
discrepancy.
 POTENTIAL RISKS
Risk Factors relating to industry conditions
New accounting, statutory, or regulatory
requirements that could impair the financial
stability or profitability of the entity
High degree of competition or market saturation,
accompanied by declining margins
Declining industry with increasing business
failures and significant decline in customer
demand
Rapid change in the industry, such as high
vulnerability to rapidly changing technology or
rapid product obsolescence
Risk Factors relating to operating characteristics
and financial stability
Inability to generate cash flows from operations
while reporting earnings and earnings growth
Significant pressure to obtain additional funds to
finance for example expansion
Significant related party transactions not in the
ordinary course of business or with related
entities not audited or audited by another firm
Unusually rapid growth or profitability, especially
compared with that of other companies in the
industry
Unrealistically aggressive sales or profitability
incentive programmes
Threat of imminent bankruptcy or foreclosure, or
hostile takeover
Risk Factors relating to management
A significant portion of management’s
compensation is represented by bonuses, stock
options or other incentives, the value of which is
contingent upon the entity achieving unduly
aggressive targets for operating results, financial
position, or cash flow
Management setting unduly aggressive financial
targets and expectations for operating personnel
Management continuing to employ an ineffective
accounting, information technology or internal
Consider if this presents a risk and if so
consider how this will be addressed
Not present a risk
Listen to employees’ voice when they notice or
become aware of a trouble that could result to
company’s catastrophe.
Not present a risk
Yes. Adapt to the new economic world where
technology is more rampant.
Consider if this presents a risk and if so
consider how this will be addressed
Not present a risk
Yes. Warehouse purchases P750,000 and loan
required P450,000
Not present a risk
Yes. 9months revenue 5.4 million is already
over the total last year sales 4 estimated total
sale growth is over 50% this year.
Yes. Sheridan AV hired and feature a football
stars for their advertising and promotion
campaign.
Not present a risk
Consider if this presents a risk and if so
consider how this will be addressed
Yes. Bonus scheme for Emily, David and Leanne
Not present a risk
Refrain from recruiting employees who don’t
know that much, instead hire employees or
audit staff
Domineering management behaviour in dealing
with the auditor, especially involving attempts to
influence the scope of the auditor’s work
Formal or informal restrictions on the auditor
that inappropriately limit his or her access to
people or information or his or her ability to
communicate effectively with the board of
directors or audit committee
Risk Factors relating to susceptibility of assets to Consider if this presents a risk and if so
misappropriation
Large amounts of cash on hand or processed
Inventory characteristics, such as small size, high Inventory management should be done
value, or high demand
Risk Factors relating to controls
Lack of appropriate management oversight (for
example, inadequate supervision or monitoring
of remote locations)
Inadequate record keeping with respect to assets
susceptible to misappropriation
Lack of appropriate segregation of duties or
independent checks
Lack of appropriate system of authorisation and
approval of transactions
Poor physical safeguards over cash, investments,
inventory or non-current assets
Lack of mandatory holidays for employees
performing key control functions
INTERNAL CONTROL QUESTIONNAIRE
CONTROL ENVIRONMENT
QUESTION
Integrity and Ethical Values
1. Does the management set the “tone at
the top” by demonstrating a
audit staffs that are knowledgeable, qualified in
a certain job and responsible one.
Not present a risk
NA
consider how this will be addressed
Assess for any anomalies in the company’s
recording transactions in quarter and year end
in considerable detail.
efficiently and effectively.
Consider if this presents a risk and if so
consider how this will be addressed
Hire someone who is trustworthy, qualified, and
suitable for this task.
Ensure continuous monitor on the records and
if possible, check areas in an unpredictable way.
Clarity of the job description and duties must be
ensured. Employees must work according to
their certain task or job.
They must assign one person who is responsible
and authoritative enough that would fit in this
kind of task.
Improve their physical safeguards with regards
to this matter.
Ensure an appropriate timetable for holidays for
their employees.
YES, NO, N/A Comments
No The management of Sheridan
 commitment to integrity and ethics
through both its words and deeds?
2. Have appropriate entity policies
regarding acceptable business practices,
conflicts of interest, and codes of
conduct been established and
adequately communicated?
3. Have incentives and temptations that
might lead to unethical behaviour been
reduced or eliminated?
Board of directors and audit committee
1. Are there regular meetings of the board
and are minutes prepared on a timely
basis?
2. Do board members have sufficient
knowledge, experience and time to
serve effectively?
3. Is there an audit committee composed
of outside directors?
Management’s philosophy and operating style
1. Are business risks carefully considered
and adequately monitored?
2. Is management’s selection of
accounting principles and development
of accounting estimates consistent with
objective and fair reporting?
3. Has management demonstrated a
willingness to adjust the financial
statements for material misstatements?
Human resource policies and practices
1. Do existing personnel policies and
procedures result in the recruitment or
development of competent and
trustworthy people needed to support an
effective internal control structure?
2. Do personnel understand the duties and
procedures applicable to the job?
3. Is the turnover of personnel in key
positions at an acceptable level?
Audio Visual Ltd does not focus
on honesty, integrity and ethical
values.
No There were no written policies
with regards to appropriate
entity policies
No Even though they have this
bonus scheme for employees,
this still can’t guarantee that
unethical behaviour will reduce.
Yes Meetings with the board are
held quarterly.
Yes Majority of the company’s
board members, with the
exception of one, have been in
No the company for a long period.
We found that the management
No has a negative opinion of the
controls after talking to
No employees and managers.
Finance isn't important to the
Managing Director because
he/she doesn't have any
No involvement, and he/she
doesn't value it either. Due to
this, fraud opportunities and
material misstatement risks are
increased in all financial
statement balances. A higher
risk of non-compliance with
standards, regulations and
banking covenants increases.
No Rosie and David have an
informal conversation regarding
new recruits but there is no
written and signed agreement.
No It’s unclear what the job entails.
Yes The turnover of personnel in
key positions at an acceptable
level
 INTERNAL CONTROL QUESTIONNAIRE

ORGANISATIONAL CONTROLS

QUESTION YES, NO, N/A Comments

Organisational controls
1. Are the following duties segregated No
within the computer department:
 Systems design?
 Computer programming?
 Computer operations?
 Data entry?
 Custody of systems documentation, It’s all done manually, so there’s
programs and files? no organizational control or
 Data control? computer department.
2. Are the following duties performed only
outside the computer department: No
 Initiation and authorisation of
transactions?
 Authorisation of changes in systems,
programs and master files?
 Preparation of source documents?
 Correction of errors in source
documents?
 Custody of assets?
Systems development and maintenance
controls No
1. Is there adequate participation by users
and internal auditors in new systems
development? No
2. Is proper authorisation, testing and
documentation required for system and There is no IT Staff yet.
program changes? No
3. Is access to systems software restricted
to authorised personnel?
No
4. Are there adequate controls over data
files (both master and transaction files)
during conversion to prevent
unauthorised changes?
Access controls
1. Is access to computer facilities Yes All staffs have individual
restricted to authorised personnel? password.
2. Is access to data files and programs No
restricted to authorised personnel?
3. Are computer processing activities No
reviewed by management?
Other controls
1. Is there a disaster contingency plan to No No formal plan exists at
 ensure continuity of operations?
2. Is there off-site storage of back-up files
and programs?
3. Are sufficient generations of programs,
master files and transaction files
maintained to facilitate recovery and
reconstruction of computer processing?
4. Are there adequate safeguards against
fire, water damage, power failure,
power fluctuations, theft etc?
Sheridan AV but Rosie is aware
Yes and considered threats to the
computer hardware/software
and has implemented controls.
No Some of the areas that are
covered by their insurance
include fire and floods.
Yes
Sheridan holds data and
programs in a secure place in
the new warehouse building
since it is away from the main
office building and warehouse;
they think that it would be
much safer.

As an example, when it comes

to fire safety, every office is
equipped with fire alarms and
the staffs have been trained on
what to do in case of a disaster.

Preliminary Analytical Review

SHERIDAN AUDIO VISUAL LIMITED

INCOME STATEMENT VERTICAL ANALYSIS
FOR NINE MONTHS TO 31 DECEMBER 2020
9 months to 31 12 months to 31
Dec 2020 Mar 2020
£ £
Revenue 5,410,175 100% 4,846,699 100%
Less: Cost of Sales 4,448,366 82.22% 3,596,251 74.20%
Gross Profit 961,809 17.78% 1,250,448 25.80%
Less:
Distribution Cost 476,826 8.81% 488,616 10.08%
Administrative Exp. 369,713 6.83% 505,198 10.42%
Finance Cost (estimate) 20,000 0.37% 46,240 0.95%
Taxation (estimate) 20,000 0.37% 102,562 2.12%
Profit after taxation 75,270 1.39% 107,832 2.22%
 SHERIDAN AUDIO VISUAL LIMITED
INCOME STATEMENT HORIZONTAL ANALYSIS
FOR 9 MONTHS TO 31 DECEMBER 2020
9 months to 12 months to Movement Movement %
31 Dec. 2020 31 Mar. 2020
Revenue 5, 410,175 4,846,699 536,476 11.6%
Cost of sales (4,448,366) (3,569,251) 852,115 23.7%
Gross profit 961,809 1,250,448 288,639 23.1%
Distribution costs 476,826 488,616 11,790 2.4%
Administrative Expenses 369,713 505,198 135,485 26.8%
(846,539) (993,814) 147,275 14.8%
115,270 256,814 141,364 55.08%
Other Operating Income 0 0 0 0
Profits from Operations 115,270 256,814 141,364 55.08%
Finance Cost (Estimates) (20,000) (46,240) 26,240 56.7%
Profit before taxation 95,270 210,394 115,124 54.7%
Taxation (estimate) (20,000) (102,562) 82,562 80.5%
Profit after taxation 75,270 107,832 32,562 30.2%

SHERIDAN AUDIO VISUAL LIMITED

STATEMENT OF FINANCIL PERFORMANCE VERTICAL ANALYSIS
FOR 9 MONTHS TO 31 DECEMBER 2020
As at Dec. 31, 2020 As at Mar. 31, 2020
ASSETS
Current Assets
Inventories 339,812 11.12% 226,549 8.79%
Trade Receivables 525,000 17.18% 672,371 26.10%
Cash 169,000 5.53% 426,359 16.55%

Non-Current Assets
Tangible 2,021,339 66.16% 1,250,700 48.55%
TOTAL ASSETS 3,055,151 100% 2,575,979 100%

EQUITY & LIABILITIES

Current Liabilities
Non-current Liabilities 689,770 22.58% 798,564 31.00%
1,171,550 38.35% 658,854 25.58%
Equity
Called up share capital
Accumulated profits 100,000 3.27% 100,000 3.85%
1,093,831 35.80% 1,018,561 39.54%
TOTAL EQUITY AND
LIABILITIES 3,055,151 100% 2,575,979 100%
 Determining Materiality Level

Auditors will choose different numbers within these ranges depending on the audit risk.

•0.5% to 1% of total revenue

•1% to 2% of total assets

•0.5% to 1% of gross profit

•2% to 5% of shareholders’ equity

•5% to 10% of net income

The level of audit risk is inverse proportional to the extent of materiality: The lesser the audit
risk, the greater the materiality level, and vice versa. Given the high audit risk, the auditor selects 0.5
percent of sales, 1% of total assets, 1% of gross profit, 2% of shareholders' equity, and 5% of net income
as the material threshold for detecting misstatements that could have a significant impact on the
financial statements as a whole.

Statement base Amount Materiality level

Revenue 5,410,175 27,051
Total assets 3,055,151 30,552
Gross profit 961,809 4,809
Shareholder’s equity 1,193,831 23,877
Profit before tax 95,270 4,764

As a result, any amount less than the materiality level is deemed immaterial.

Write a short document describing your assessment of risk in this audit and how this will
affect subsequent work.

Sheridan AV specializes in high-end audio visual systems. Market movements and uncertainty as a
result of changing consumer tastes affect its business. Decade after decade, Sheridan's inventory has
continued to rise. As a result of poor market conditions or new products from competitors, Sheridan
AV's sales may be adversely affected, and their inventory may become out-dated. Inventory will be
affected as if new products from competitors enter the market, inventory from Sheridan AV which can
be previously sold at X amount will have to be valued lower. In spite of the current recession in Spain
the company is still considering expanding there. There will be an impact on sales if the recession gets
worse. As a result, they will suffer because they are more of a luxury good than a necessity for the
majority of consumers. Moreover, categorizing and controlling workplace hazard is essential for a safe
and healthy workplace. You'll find a description of the company's appropriate business practices as well
as information on conflicts of interest, protocols, and ethical standards. Be familiar with the job's
responsibilities and procedures as well as its requirements. It is therefore necessary to hire or train
competent and trustworthy personnel to support an effective internal control system. As a result of
these factors, the inherent and residual risk is significant. Assuming everything goes according to plan,
it's possible that the areas for improvement will go unnoticed if the planning phase is carried out
without adequate documentation. They may succeed, but they will not be able to maintain their
leadership position. Fraud and mistakes are more likely to occur when employees are unaware of what's
going on within the company.