1.

Write a note for the audit file that evaluated the company’s business risks and the related inherent
risks:

Since the company has recently changed its business model to sell its entire product online and have
rapidly closed all its stores, it seems that the company has overweighed the new business model to sell
everything through the digital medium. It has justified its actions of closing all the stores by mentioning
that it shall save huge costs i.e. Salaries of 9 employees and rental cost of expensive premise (as now
they will have only a space in outskirts for keeping the inventory). While these may seem interesting to
expand customer base without any boundaries, but at the same time – closing all its physical stores in so
much haste may prove to be risky affair and can disrepute the business in the eyes of its customers. As a
result, it may not see the output i.e. Sales numbers of $1.2 million+ a year. Along with this, initial
marketing and infrastructure expense might be burdensome, if it fails to get the expected returns.

Hence, attention needs to paid on the feasibility of sales in practical sense and see how the competitors
already selling online CDs and music accessories gathered market and performed in their transition in
order to make sure that it doesn’t hamper the “going concern”.

As per AS 2110: Identifying and Assessing Risks of Material Misstatement >>> “Business risk is mostly
related to the risk that the business will not be able to achieve its targets or will not be able to
perform as it expected.”

Attention would also be needed while presenting an opinion on the financial statements and the
arrangement that the TSL has made with the prominent music magazine publisher i.e. Still spinning
magazine. The arrangement prescribes TSL to pay 5% of sales value of CDs generated through ha special
affiliate address published only in Still spinning journal. On the other hand, Still Spinning publishers shall
pay 20% of their magazine sales or subscriptions generated through TSL website.

Hence, the sales or the subscriptions data is based upon uncertain future and nobody can accurately
forecast how much amount would be payable or receivable by either of the parties to this Joint Venture.
Hence, it shall be risky to certify any amount for commissions that will be payable by one party to
another. This may cause expressing an inaccurate opinion and also can mislead the stakeholder if this
opinion/certification is provided.

As per AS 1101: Audit Risk >>> “Inherent Audit risk is a risk which can cause material misstatement
due to low professional care or unavailability of sufficient appropriate evidence.”
 In the present case, there couldn’t be any evidence for the sale of CDs or magazines which would
become reasons to believe that these shall be the possible figures with certainty.

2. Write a letter for the Audit Partner to send to George:

Under this, we need to report the matters on which we can provide the assurance i.e. we can sign the
certification along with the scope and content in the report.

As we know that the commissions that would be payable under the Joint Venture arrangement, is based
upon 3 factors as mentioned below:

a. Sales Volume
This would be the number of products sold through the magazines, and would solely be
dependent upon the circulation of magazines and penetration & conversion rate that the
readers will go to the website and ultimately execute the purchase.
This volume can be estimated on the basis of past conversion of similar (not identical) products
through this magazine.
For example: If 100,000 readers read this magazine every month, and out of them 10% readers
actually went through the link and bought the product.
On the basis of such historical numbers, a reasonable (but not absolute) assurance can be made
for the volume numbers.

b. Price Charged
Since, TSL offers various products through the online channel and music magazine and prices for
each product would vary as per its utility and input cost. These prices are generally fixed by the
management and a general price can be put to use for each product while computing the sales
revenue on the basis of which commission shall be payable.

c. Discount to first time buyers

From the world of 7 billion people, there is always a hope and scope that a new user shall get
added and TSL is offering $5 discount to new users on their first purchase. This again need to be
seen from the historical trend (which can be increasing or even decreasing) and can reasonably
 expect that trend to continue in future as well. In this way we can adjust the sales revenue for
discount offered to first time buyers and compute the commission payable.

The above 3 factors would be crucial inputs for providing a reasonable (i.e. not 100%) assurance on
how much commissions shall be payable by each party to other.

The assurance report shall include following disclosures to ensure the compliance with Auditing
Standards issued by PCAOB.

1. Disclosures wr.t. to Procedure and its Limitations

Audit or Assurance report shall include the limitations that would apply to the certified figures.
It would describe the methodology on how forecasted commissions have been derived through
its above mentioned 3 components and the applicable limitations while estimating these
numbers. Since, nobody can be accurate with respect to uncertain future; hence there would
always be limitations or boundaries to the judgments of Auditor and these needs to be
disclosed.

2. Signification Risk
Relying upon these forecasted and certified numbers is prone to risk that the numbers may not
show up in the future as per the expectations due to several factors such as infrastructure
failures, regulatory changes with respect to E-Commerce sales, customer tastes, customer’s
acceptability for this new idea etc.
These risk have to be mandatorily become part of Audit Report as per the PCAOB Audit
Standards.

3. Opinion
Last portion and very important part of the report is needed for forming an opinion on the
estimates adopted by the company for forecasting their revenues and hence commission
payable.
Opinion can be of 3 types:

a. Unqualified Opinion
This signifies that no material misstatement is there and reasonable assurance is provided
on the matter audited or certified.
b. Qualified or Adverse Opinion
When there exists a material misstatement or manipulation w.r.t. forecasting the numbers
in this case, a qualified opinion would need to be given.

c. Disclaimer of Opinion
This opinion is given when Auditor is not sure on the basis of Audit Evidences he has got or
he has not got. This signifies that the auditor is not able to express its opinion on the subject
matter.

Therefore, there are 3 areas (i.e. Limitations, Significant Risks and Opinion) which must be
included while drafting an Assurance Report. This helps stakeholders to have better
understanding of the company’s finance stability and helps them to rely easily on the affairs
of the company. And since commission payable is more related to future events (and not
historical) that haven’t occurred yet. Hence, disclosure of limitations and risks become
mandatory.