Evaluation of the Audit Work Performed on Company A

You have recently been hired as a practice inspector for CPA Ontario. This involves reviewing files of CPA firms of all sizes in Ontario, to ensure they are following the appropriate standards. Your first assignment is to review the files of , CPA, a sole practitioner operating in Mississauga, Ontario. CPAhas only one audit client, but has several review and compilation engagements. You decide to review the audit engagement file. Your review of the working papers revealed the following: Audit file (“Company A”).  Engagement letter, letter of representation and the legal letter were all signed and dated by the appropriate individuals on March 31, 2022, the fiscal year end of the client. The audit was completed on April 24, 2022. A standard audit report was issued.  Tests of control were performed during December 2021.  Tests of detail were performed during March 2022.  Audit risk, control risk and inherent risk were all assessed at low; detection risk was set at high.  Materiality was based on 10% of “normalized” shareholders equity.  “Understanding of the entity” memo had the following highlights: o Company A is a manufacturer of toys for children. o Company A is owned by three individuals, two of which are not active in the business and therefore demand an annual audit to monitor their investment. o Line of credit is financed by receivables and inventory and is at maximum at March 31, 2022. o Long term debt is financed by manufacturing equipment.  Company A experienced its first loss ever in the March 31, 2022 year.