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Audit Planning Process of Toxic Waste Disposal(TWD)

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Bond, CPA, is considering audit risk at the financial statement level in planning the audit of Toxic Waste Disposal (TWD) Company's financial statements for the year ended December 31, 2004 TWD is a privately owned company that contracts with municipal governments to remove environmental wastes. Audit risk at the overall financial statement level is influenced by the risk of material misstatements, which may be indicated by a combination of factors related to management, the industry, and the company.

Company Profile
This was the first year TWD operated at a profit since 2000 because the municipalities received increased federal and state funding for environmental purposes.
TWD's board of directors is controlled by Mead, the majority stockholder, who also acts as the chief executive officer.
The internal auditor reports to the controller and the controller reports to Mead.
The accounting department has experienced a high rate of turnover of key personnel.
TWD's bank has a loan officer who meets regularly with TWD's CEO and controller to monitor TWD's financial performance.
TWD's employees are paid biweekly.
Bond has audited TWD for five years.
Recent Developments
During 2004, TWD changed its method of preparing its financial statements from the cash basis to generally accepted accounting principles.
During 2004, TWD sold one-half of its controlling interest in United Equipment Leasing (UEL) Co. TWD retained significant interest in UEL.

During 2004, litigation filed against TWD in 1996 alleging that TWD discharged pollutants into state waterways was dropped by the state. Loss contingency disclosures that TWD included in prior years' financial statements are being removed for the 2004 financial statements.
During December 2004, TWD signed a contract to lease disposal equipment from an entity owned by Mead's parents. This related-party transaction is not disclosed in TWD's notes to its 2004 financial statements.

During December 2004, TWD completed a barter transaction with a municipality. TWD removed waste from a municipally owned site and acquired title to another contaminated site at below-market price. TWD intends to service this new site in 2005.
During December 2004, TWD increased its casualty insurance coverage on several pieces of sophisticated machinery from historical cost to replacement cost.
Inquiries about the substantial increase in revenue TWD recorded in the fourth quarter of 2004 disclosed a new policy. TWD guaranteed several municipalities that it would refund the federal and state funding paid to TWD if any municipality fails federal or state site clean-up inspection in 2005.
An initial public offering of TWD's stock is planned for late 2005.

Assume that your firm is considering taking on Toxic Waste Disposal Company (TWD) as a client. Considering the 15 items listed in the problem, prepare a 1,100-1,750-word paper in which you do the following:
a. Discuss the risks associated with taking on TWD as a client. Be sure to take into account the provisions of SAS 99 and to identify potential fraud areas. Recommend ways to mitigate the risk associated with taking on TWD as a client. Nancy
b. Recommend ways to mitigate the audit risk associated with the 15 factors listed for TWD.
c. Assuming your firm decides to take this audit, analyze the various elements of the audit planning process and how these elements will pertain to the TWD audit.

I need help with the following:

Assuming your firm decides to take this audit, analyze the various elements of the audit planning process and how these elements will pertain to the TWD audit.

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Solution Preview

The firm has decided to take the audit, so the steps of the audit planning that will be taken up will be:

The audit engagement letter will be prepared. By Bond, CPA and will be addressed to Toxic Waste Disposal Company, the letter will contain the nature, scope, limitations and compensation details of the engagement. The appointment period will be mentioned, normally it is one years engagement. The letter will specify that Toxic Waste Disposal Company will provide all documents for verification and completed financial statements by a due date failing with Bond, CPA will be authorized to prepare the financial statements for the purpose of review.
In the engagement letter Bond, CPA will mention the scope of the audit, this will include the fact that the responsibility of Bond, CPA will be limited to the examination of general purpose financial statements, this is the minimum level audit scope. In addition, the four quarters of 2004 for which the audit will be carried out ...

Solution Summary

This solution identifies the professional guidance that would assist Reddy & Abel to make decisions about client acceptance.. Then it gives you an audit engagement letter that Reddy & Abel gives to its client. .