EyeMax is a company, which is engaged in research and development, manufacture and sale of medical devices used by ophthalmologists during eye surgeries. EyeMax started with the advanced laser technology designed for use in optic surgery. The customers of EyeMax are primarily doctors of ophthalmology and laser-eye clinics. Wayne Carruth, the founder of EyeMax, and his immediate family owned 30% of the stock in EyeMax. The company employees own 40% of the stock. Venture capitalists and a few outside investors hold the remaining shares.
Eight people are in the accounting department of EyeMax: the controller is a CPA, the accounting supervisor and payroll supervisor each have supervisor with college degrees in business, and the remaining five employs have limited experiences and training.
EyeMax has been an audit client for 5 years. Accounting misstatements were generally detected in the audits of previous years, and the management of EyeMax has readily made the recommended adjustments.
However, this year, the president of EyeMax has provided shareholders and creditors with preliminary earnings information without prior consultation with the audit firm, before the audit firm finished the fieldwork. The president insisted that no adjustment should be made unless it is absolutely essential for fair presentation. Especially, because earnings had already been announced they would prefer not to book any of the items in the fiscal year under audit.
Total financial statement materiality was set at $625,000, which is equal to approximately 5% of earnings before taxes, and the level of potential aggregate misstatement including upper bounds suggests a significant adjustment would be required to reduce audit risk to an acceptable level. In the planning phase of the audit, both inherent risk and control risk were assessed at less than the maximum but the audit plan specifies an audit approach that relies primarily on substantive testing.
Planned audit fieldwork...
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