Case 5.

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B)
When making an inherent risk assessment, I have to assess the risk of
material misstatement of financial statements without examining the
internal controls of IndaCar Inc.
Firstly, I must gain a thorough understanding of the entity level of the
client. IC is operating in a highly competitive location and industry. It is
located right next to Lester B. Pearson Airport, and is also exposed to
competition against the other car rental companies nearby. IC operates
in a niche market because they rent out unique high-end cars. As such,
their revenues might not be as high as other car rental companies that
have a variety of cars to rent from which will lead to greater profit
opportunities. It would also be beneficial to access ICs capability to
adjust to changes in the market. For example, since the company relies
on new unique models to rent out, they must adapt to the changes in
the car industry and their respective models. Other things to consider
about the entity level are the sources of finance that IC is using to
purchase its vehicles (and whether it is obtaining a specific debt to
equity ratio), their reputation within the industry, and ICs major
suppliers of vehicles.
After, a thorough understanding of the industry level must be
developed. Jake is exploring the opportunity to expanding ICs
operations to include Vancouver and Calgary airports, and for this to
happen, there is a high risk that managers might want to overstate
revenues and understate expenses to make financial statements look
more attractive to the potential investors. I will then need to gain a
further understanding of IC and its compensation structure and see
whether managers bonuses are tied with company performance. If so,
that gives a bigger incentive for managers to overstate revenues and
understate expenses to achieve higher expectations.
Finally, the economy level during the time of the audit will be
considered. IC is susceptible to downturns in the economy. For
example, if there was a recession, there would be an overall decrease
in the number of travellers, and people might prefer public
transportation rather than renting a car to save costs.
To conclude, by taking these factors into consideration, I believe that
the inherent risk is high.
C)
The control risk and inherent risk are both assessed as high, and as
such, detection risk will be set as low. I will take a predominantly
substantive audit approach. I will not rely on clients internal controls

but increase the reliance on detailed substantive procedures that

involve intensive testing of year-end account balances and
transactions from throughout the year. This will definitely impact the
extent of audit testing and the amount of audit work needed to be
performed. This will result in more time needed to investigate
managements assertions on transactions and year-end balances. To
conclude, I must rely on extensive substantive procedures to uncover
any material misstatements presented in the financial statements.
E)
1. Accounts Receivables
Regarding managements balances assertions, existence, rights and
obligations, completeness, and valuation and allocation must be
evaluated. I must trace customer receipts to confirm that the account
receivables amounts that were recorded actually do exist (they are not
faulty or manipulated sales) and that values were reported at the
appropriate amounts. Credit sales and the relationship with credit card
companies must be examined closely because there might be a risk
that customers may not pay their outstanding balances, thus affecting
the valuation of the accounts receivable (bad debts and allowances).
2. Property, plant and equipment
IC is a car rental company and therefore, property, plant, and
equipment would occupy the largest part of the assets. This would
refer to the assortment of cars that IC could offer to rent out. The
assertions that must be evaluated are rights and obligations,
completeness, classification and understandability, and accuracy and
valuation. I have to trace the ownership documents of the vehicles to
ensure that IC has complete legal ownership over the vehicles.
Completeness, classification, and understandability would refer to
checking the notes of the financial statements and making sure the
appropriate depreciation methods have been disclosed for the
vehicles. For accuracy and valuation, I would need to ensure that the
values are mathematically correct taking into consideration the
depreciation method stated in the notes.
3. Account Payable
The assertions that will need to be evaluated are existence, rights and
obligations, completeness, and valuation and allocation. I must trace
the invoices, purchase orders, purchase requisition, receiving reports,
and remittance advices that have been issued to ensure that such an
amount needs to be paid in the future, that the amount stated are
indeed obligations to the company, and all obligations that need to be
recorded have been recorded. I must also ensure that the amount
recorded are correct and have been adjusted for any discounts that the
suppliers may have given.

4. Long- Term Debt

The assertions that will need to be evaluated are occurrence,
completeness, accuracy, cut-off, and classification. I will need to trace
the long-term debt documents (such as written contracts) to
understand the underlying obligations that the company has regarding
its long-term debts. The debt amount recorded must be ensured that it
is mathematically correct, recorded in the correct accounts, and are
complete. This will also take into consideration the occurrence and
accuracy of the interest payments and interest expenses occurred
during the year (assuming an interest rate exists and regular interest
payments have to be made). In addition, it must be clear that the
interest expenses occurred near year-end have also been recorded in
the correct period.
5. Car Rental Sales- Regarding managements transaction assertions,
accuracy, cut-off, completeness, and occurrence must be evaluated.
This can be done through examining customer receipts and their
respective balances and tracing those balances to the general ledger. I
would have to make sure the proper amounts are recorded in the right
period and appropriate accounts (cash or account receivables) and that
the recorded sales amounts have actually occurred. Special attention
must be given to sales or prepaid sales at the end of the period to
ensure that recorded sales amount relate to the 2012-year, especially
near year end.