Audit Project: Inherent Risks and Control Design for Marco Appliances

This project analyzes the audit of Marco Appliances, Inc., a small appliance wholesaler. The assignment includes an acceptance letter to the audit team, an engagement letter, and an inherent risk and materiality memo. It examines the company's financial statements, including balance sheets, and assesses inherent risks such as inventory management, control environment, and cash flow. The project also involves evaluating control strengths and weaknesses in sales, collections, and purchase systems, along with recommending improvements. The audit team, Levin, Lombard, & Wolod, LLC, is tasked with applying international auditing standards under the leadership of the audit head. The project highlights the importance of risk assessment, control design, and financial statement analysis in the auditing process, providing a comprehensive overview of the audit engagement.

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Date: 11 / 04 / 2020
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Acceptance Letter
To The Partner of Audit Team
Levin, Lombard, & Wolod, LLC
Sub: - Acceptance of the client Marco Appliances, Inc for Performing Audit.
Respected Sir,
Marco Appliances, Inc is a small appliance wholesaler shop situated at 18 January Lane in
Annapolis, MD 21401. The status is about the company is that the sales for the year ending 2019
will be $ 3,214,029 and the net profit was about $ 82231. It is having an employee strength
which being around 50, on the more the company incorporated a profit sharing bonus agreement
which included the top management as well. While performing the audit standards International
auditing standards would be applied to the engagement under the leadership of Audit head. In
full cooperation of the Secretary/Treasurer Harper Kim, the Accountant Stephen Violet, the
Bookkeeper Cooper Teal and the Board Member Montana Green, CPA (retired).
Further, the Client acceptance will be done fully in terms with keeping in mind the risk
associated in business as well as the allied tax ruling and other rules and regulations. On the
more, audit firm will coordinate the relation of the third parties which being the customers, along
with vendors, adding more is the financial institutions, and to the most essential is the legal
counsel that would be relevant to assess audit risk.
Yours Sincerely,
Audit Manager

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Levin, Lombard, & Wolod, LLC

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Engagement Letter
To
The Controller Dakota Amalia,
Macro Appliances Inc
Annapolis, MD 21401
Sub: Engagement Letter to Perform Audit for the Financial Year 2019.
Dear Sir,
The letter will confirm the concepts of limitations of audit services along with various terms
under which the audit will be performed for the respective client Macro Appliances Inc for the
current financial year 2019.
Audit will include the statements which may be related to the income of the current financial
year along with the retained earnings along with the cash flow analysis as well as it will assure
that the purpose of expressing an opinion on them is achieved in a corrective manner.
We are glad to inform that we accept to undertake audit on the company in all rightful and honest
manner. On the more, it is well evident that the engagement letter henceforth, will act as an
contract legally binded between two parties which being Macro Appliances Inc and the audit
firm Levin, Lombard, & Wolod, LLC.
It is essential to understand that the service will lead to a position where the risk will be reduced
and the material misstatement can be reduced.

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The other important element is that the fees will be charged on a work on progress basis which
will be billed every quarterly. The total engagement fees for the year will be equal to $ xxxxxxx
which excludes any taxes charged by the government. The above fees will also not include the
out of pocket expenses as well as any other chargeable expenses.
If any dispute arises within the parties hereto, the costs of mediation shall be shared
Equally by the parties.
The above agreement is willing signed by both the parties in complete knowingly and
Voluntarily basis.
These letters if correctly expresses the understanding, Kindly sign one copy of agreement and
return it back.
We would like show are gratitude that you have provided as an opportunity to serve you and too
much faith the association will be long going and definitely a pleasant one.
Yours Sincerely,
Levin, Lombard, & Wolod
By: _______________________________ Date: ______________
Auditor (Your handwritten signature)
By: ________________________________ Date: ______________
Marco Appliances, Inc.
By: ________________________________ Date: ______________

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Inherent_risk_and_material_memo_template
Marco Appliances, Inc.
Inherent risk and material memo template
Initials WPB 2.1 Date
Prepared
Reviewed
Preliminary Inherent Risk Assessment
The first and foremost is the maintenance of the large inventory according to the customer needs
as this will assure that the sales are matched in terms with the inventory produced and should
also keep a check that the inventory is neither overstated nor becomes damaged or obsolete.
The second risk can be assessed in terms of the control environment where the computer system
and personal computer as well as the other information technology have major concerns on
account of the user id and password. It is essential that the password must be secured and strict
otherwise the risk can be massively spread.
The other major issue is that of the backup which is done manually and as well as it does not
have a proper internet linked process which may reduce the risk and the secure the system on the
files updated on the cloud or other engine.
The other concern is that the perpetual inventory records where the whole accounting system and
the management of the sales orders as well as purchase orders along with the returns requests. It

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requires a dedicated team to keep a check on this system otherwise the whole system can be
more confusing and risk taking.
The other inherent risk which raises the question is that the cash and cash equivalents as
compared to last year has changed massively and the reduction is about fifty percent as well as
the money market funds which has reduced by a level of forty percent. This segment will
question the liquidity of the company and may create serious risks as the managing of the funds
can be difficult.
Complete Control Template
The control template consists of three strengthens and three weakness of the company which is
explained as follows:-
In connection with the Sales and the Collection and Processing System following points are
evident
In connection with strength the organization clearly deals with a system where the perpetual
inventory system is followed to assure that the real time basis inventory accounting is done and
the inventory is correctly managed and processed.
The weakness on this account is that the approval and checker system is not that strong and
ridged therefore, it becomes difficult to maintain privacy and authenticity which becomes a
difficult option on a larger basis and becomes a complicated matter.
In connection with the Collections Management and Write-offs System following points are
evident

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In connection with strength the organization clearly deals with a system or a properly allied
software where the account receivables and due dates are accustomed and triggered on regular
basis. This helps in checking the collection id done in a right and a regular manner without any
problems and issues.
In connection with the weakness the major concern is with terms of the sales return where the
proper recording and accounting of the sale return is not done even the memorandum printing
and the physical checking is also not done in a right and a correct basis. Therefore, leading to
major problems and issues.
In connection with the Purchase and Payments Processing System following points are evident
In connection with strength the organization clearly deals with a rightful vendor management
system where the computer prints a sequentially numbered, five-copy purchase order form
addressed to the supplier who quoted the lowest price. In true sense it picks the vendor with the
lowest price.
In connection with the weakness the major concern is with terms of the receipt of the goods
where the issue arises where the damaged goods are also accepted and marked as a received
mainly because it only checks the exterior part excluding the option where the actual goods can
be damaged irrespective of the factor that the exterior is not damaged.

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