Engagement Letter 2/2/2020 VRTECH Limited, Dear Michelle Parker, RE: Engagement Letter

External Auditing Canadian 1 Name Institution 1-Planning 1-1-Engagement Minutes and Staffing Memo Engagement Letter 2/2/2020 VRTECH limited, Dear Michelle Parker, RE: Engagement Letter The Letter is to inform our understanding of the terms of our engagement, the nature, and limitations of the services that we give. Our scope of services will entail risk assessment, detection, and prevention of fraud and error, boost the morale of accounting staff, give assurance and credibility, and ascertain tax liability.

External Auditing 1
Name
Institution

1-Planning
1-1-Engagement Letter and Staffing Memo
Engagement Letter
2/2/2020
VRTECH limited,
Dear Michelle Parker,
RE: Engagement Letter
The Letter is to inform our understanding of the terms of our engagement, the nature, and
limitations of the services that we give. The contract begins on January 1 2020 and ends on
January 1 2021. Our estimated fees for the service are $70,000. If any issues arise to cause the
work to be more extensive, VRTech would be informed immediately by Mr. Adler. Any
additional services, such as preparing income tax returns, would be extra. The conduct of this
engagement as per the standards and ethical requirements of Canadian auditing standards.
Our scope of services will entail risk assessment, detection, and prevention of fraud and
error, boost the morale of accounting staff, give assurance and credibility, and ascertain tax
liability. The scope of services will also entail, showing the fair value of assets to be acquired in
case of merger, acquisition, and takeover.
Our statutory objectives will require us to certify the Company's financial position at the
end of the audit, whether financial statements portray an accurate and fair value. We will also
write a report at the end of the review to communicate our opinion arising out of our
examination. We will also give a management letter, which will highlight problems in the

internal control system, planning implementation, budgetary controls and investment
management. We will also ascertain whether the Company has kept proper books of accounts.
We will provide a list of schedules for various accounts that our staff could have prepared
by the time fieldwork starts near the beginning of January. The clients' staff will make some
schedules and analyses for the previous auditors. We have no conflict of interest.
We now accept the terms of the engagement letter
Signature
Staffing Memo
Audit staffing memo
Upon reviewing the background paper and minutes of the audit committee, there is a
need for a special audit or accounting expertise for any of the work that we have agreed to
perform. There is also a need for specialized business knowledge regarding the primary type of
business and products VRTech sells. Therefore, it has been determined the audit team should
consist of the following personnel:
1. Tax specialist
An auditor with tax expertise is necessary because VRTech has issues on taxation that needs to
be analyzed. Therefore, the tax specialist will aid in unveiling taxation issues of the client.
2. IT specialist

An auditor with technological expertise is necessary because VRTech Company is based on
virtual technology. Therefore, the auditor will aid in understanding the client’s business
environment and technicalities.
3. Arnold Wallace, Partner in charge of the audit
The audit partner will oversee the whole audit assignment, collect audit fees from the client, and
also ensure the client's representation in the entire auditing process.
4. Michael Adler, Engagement Manager
The engagement manager will work directly with Michelle Parker, the finance director. He will
also engage closely with senior staff to understand the nature of the business. He will also
identify and manage risks, produce reports highlighting problems and solutions. He will also
ensure adherence to audit methodology and Canadian standards of auditing.
1-2-Review of Minutes
Minutes indicate VRTech has weak internal controls, for example, understaffing of
accounting staff, management of the Company by one person, George Cameroon, and low
turnover of crucial accounting personnel. Other red flags entail unreasonable response of
management to audit questions, such as involvement of Michelle Parker in misstatements
uncovered in the audits.
1-3-Comparative trial balance and analytical review
1. Lawsuit

Following the lawsuit for $80,000, auditors will communicate with company lawyers on
December 23, 2018, to ascertain the possibility of such a lawsuit becoming a contingent liability.
Auditors will also request representation from management regarding such suits to ensure they
have been appropriately recorded. Auditors will also check the recording of such obligations, be
it under current liabilities depending upon the period they are expected to crystallize. Auditors
will then advise the client to settle such obligations.
2. Trade payables
On December 16, 2018, auditors will check the strengths of the internal control system. Auditors
will also prepare a schedule for creditors and compare entries therein with those in invoices,
debit notes, and deliveries. Auditors will then select a sample of trade creditors for
circularization to ascertain the amount owed. Auditors will then test cut off procedures to ensure
they have been appropriately recorded. Auditors will then conduct a substantive test to ensure
purchases were adequately recorded. Auditors will then check recordings in creditors' schedules,
ledgers, and purchase ledgers in the balance sheet.
3. Inventory
On December 8, 2019, the audit team will check the year's working papers and review stock-
taking methods to ascertain whether they give assurance of volume and value. Auditors will then
checks the internal control system and ensure purchases and stocks have been appropriately
maintained. Auditors will also check variances of figures and inventory in the existing financial
period and compare them with those of the previous period. Auditors will also check standard
costing statements to ascertain the value of stock in trade from the point of view of variances.

Auditors will also compute the stock turnover for the current financial period and compare it
with stock turnover for the previous year and investigate unfavorable differences.
1-4-Materiality Memo and Fraud Risk Memo
Materiality Memo
To: VTECH LIMITED
From: AUDIT
Subject:
The auditor's consideration of materiality at the planning stage entails identification of the
possible audit risk. Auditors should also set an acceptable materiality level to enable them to
detect quantitatively material misstatement when carrying out the audit work. Bassey1 explains
that materiality can be considered at the financial statement level and more specific transaction
and balance level. Materiality could be based on management accounts budget figures and, to
some extent, prior to year's numbers.
Additionally, auditors should also determine audit resources and audit approaches.
Christensen2 states that auditors should also consider qualitative materiality at the planning stage.
The criteria to be used could be a threshold of 1% or 2% of revenue or 2% to 4% of the balance
sheet total assets. A 5% to 10% profit before tax threshold could also be used.
The auditor's consideration of materiality at the overview review stage requires auditors
to consider materiality when investigating the effects of misstatements on the financial
statements. Auditors have to consider the implication of materiality on their report if
management refuses to correct errors that the auditors believe are material or even pervasive to

the accounts. According to Dezort3, auditors also consider the cumulative effect of the
immaterial mistake to see if they have a substantial impact in total. Auditors can also report
material discovered errors to management and those charged with governance.
Auditors consider the dollar amount of materiality through rules of thumb, professional
judgment, amount and type of misstatement, for income, sales, and total assets. According to
Lakis4, the minimum material misstatement for VRTech is 16923186. Thus, adjustment is
required if the amount is higher or equal than this.
Fraud Risk Memo
To: VRTECH
From: MICHAEL ADLER
Subject: Memo on consideration of potential fraud
Fraud risk refers to the intentional misrepresentation of financial information by
individuals among management, employees, and 3rd parties. Carvalho5 states that types of fraud
risk include asset misappropriation, bribery, corruption, and financial statement fraud. Fraud risk
occurs inform of manipulation, both falsification, and alteration of records, misuse of assets for
personal use, and omission of a transaction from documents. Fraud risk also occurs by recording
transactions without substance and misapplication of accounting principles.
According to Hess6, fraud risk can be detected through the use of analytical reviews to
investigate any unfavorable variances, surprise checks on petty cash, wage payment, and stock
and investigation of anomalies. It can also be detected using comparison and search inquiry

through investigation in prone areas. Weber7 explains that other methods of detection entail the
use of an initial examination of the selected transaction, which is checked from their initial stage
to the final step.
Signs of fraud risk include unaccountability due to a high turnover of crucial accounting
personnel, unethical practices due to a high turnover of the Company's advisors. Other signs
include management of a company by one person, pending weaknesses in the organization,
understaffing of accounting staff, and a declining business. Suryandari8 explains that fraud is
perpetrated by the weak internal control system, for example, lack of authorization and approval
controls, absence of arithmetic and accounting controls, lack of rotation of duties, and
supervision. Lack of segregation of duties and improper planning also perpetrates fraud in an
organization. Muthkrishan9 explains that alteration of audit approach occurs through the
assignment of personnel, predictability of auditing procedures, and examination of journal
entries.
VRTech has several red flags of fraud risks, for example, understaffing of accounting
staff, management of the Company by one person, George Cameroon, and low turnover of
crucial accounting personnel. Other red flags entail unreasonable response of management to
audit questions, such as involvement of Michelle Parker in misstatements uncovered in the
audits.
2-Internal Control
2-1-Control Evaluation in the Revenue Cycle
Trial balance is drawn to ensure figures in financial statements are correct. Additionally, ledgers
and journals are drawn to keep a record of cash flow activities.

2-2-Control Evaluation in the acquisition and expenditure cycle
There is a weak internal control in the acquisition and expenditure cycle duties are not
segregated among personnel, and thus leave a room for fraud. Additionally, acquisitions are not
approved by the head of department, and thus leave a room for fraud.
3-Internal Control Testing
3-1-Control Testing in the Revenue Cycle
There is a weak internal control in the cash management because of lack of supervision of cash
disbursement. Lack of supervision leaves a room for manipulation of figures. There is a need to
investigate cash management.
4-Cash
4-1-Bank Reconciliation
There is a weak internal control in the bank reconciliation because of lack of rotation of duties.
For example, cash personnel use the duplicate deposit slips retained when bank deposits were
made, the cash receipts journal listing, and the cash disbursements listing to reconcile the general
bank accounts. Controller compares cash receipts journal daily deposit records with the bank
deposits and duplicate deposit slips when the general bank account reconciliation is performed.
5-Accounts Receivables
5-1-Confirmations
Lack of segregation of duties at the accounts receivable processing is a weak internal control that
leaves a room for manipulation of figures. For example, the credit manager post-credits to

individual customer accounts, mails statements of accounts receivable balances to customers and
also reconciles customers’ reports of disputes.
5-2-Allowance of Doubtful Accounts
There is a weak internal control in the sales and accounts receivables, because the department
does not screen customers before giving them items on credit. It is necessary to check the
creditworthiness of the customer, to minimize both bad debts and allowance for bad debts.
6-Inventory
6-1-Physical Inventory test
There is an increase in the amount of revenue from 2017 to 2016 by 93, which is a small amount
compared to the amount of inventory that was added in 2017. For example, physical inventory
test shows that new machineries were added in 2017, such as VRTech information system.
7-Fixed Assets
Fixed assets follow zero salvage values in all depreciation calculations, yet depreciation for
partial years will follow the half-year convention. There is a need to investigate the computation
of the depreciation method.
8-Liabilities
8-1-Unrecorded Liabilities
Unrecorded liabilities cause some variations to occur. For example, there is an insignificant
difference between liabilities in 2016 and 2017 of 325, yet there were restrictive covenants to
reduce liabilities within a shorter period. For example, dividends may be declared only from

Retained Earnings in excess of loan balance and further borrowing is prohibited until the
Banknote has been amortized below $300,000. Therefore, the insignificant difference needs to be
investigated.
9-Payroll
Minutes of the board of directors indicate some approved salary increment of the Company's
officers. The basis for the salary increment needs to be investigated.
10-Revenue
Cash at hand and cash at bank needs to be reconciled to ensure proper records are maintained.
11-Expense
There is a need to approve and authorize the Company’s expenses to prevent fraud. Heads of
department need to keep a record of all expenses.
12-Subsequent events
There is a need to adjust events that occur between the reporting date and approval of financial
statements to prevent variances of figures.
13-Proposed Audit Adjustment
According to the horizontal analysis of the balance sheet that was done on January 2, 2019,
current assets seem to be inconsistent and need further investigation because there is an
ambiguous range from 2016 to 2017. Two thousand sixteen current assets have an error because
it is understated by 5085. According to financial ratios that were done on January 8, 2019, the

current ratio seems to be inconsistent and needs further investigation because there is an
ambiguous range from 2016 to 2017. In 2016, it was 0.2, whereas, in 2017, it was 2.
14-Management Letter
To: VRTech Company
We conducted our audit by Canadian generally accepted auditing standards. We are
independent of the Company by the ethical requirements that are relevant to our audit of the
financial statements in Canada, and we have fulfilled our other ethical responsibilities by these
requirements. We believe that the audit evidence we have obtained is sufficient and appropriate
to provide a basis for our opinion.
We have audited the financial statements of VRTech Ltd. (the Company), which
comprise the statement of financial position as at December 31, 2017, and the statement of
income, statement of changes in equity and statement of cash flows for the year then ended, and
notes to the financial statements, including a summary of significant accounting policies. In our
opinion, the accompanying financial statements present fairly, in all material respects, the
financial position of the Company as at December 31, 2017, and its financial performance and its
cash flows for the year then ended in accordance with International Financial Reporting
Standards (IFRSs).
Management is responsible for the preparation and fair presentation of the financial
statements in accordance with IFRSs, and for such internal control as management determines it
is necessary to enable the preparation of financial statements that are free from material
misstatement, whether due to fraud or error. Management is also responsible for the

implementation of internal control systems, such as segregation of duties, approval and
authorization, supervision, physical controls, and rotation of duties.
The engagement partner on the audit resulting in this independent auditor's report is
Arnold Wallace.
Wallace Miller and Thompson
Audit Firm

References
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Auditing Practices and Decision Making. Decision making. 2018;9(2).
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Disclosures on Investors’ Decision Making. Available at SSRN 3096564. 2018.
3. DeZoort FT, Holt TP, Stanley JD. A comparative analysis of investor and auditor
materiality judgments. Auditing: A Journal of Practice & Theory. 2019 Aug;38(3):149-
66.
4. Lakis V, Masiulevičius A. ACCEPTABLE AUDIT MATERIALITY FOR USERS OF
FINANCIAL STATEMENTS. Journal of Management. 2017 July 1;2(31).
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domain name fraud risk assessment. United States patent US 9,558,497. 2017 January 31.
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Horizons. 2016 January 1;59(1):13-8.
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9. Muthukrishnan RK, Kalaiah P, Kumaraswamy S, inventors; Visa International Service
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