memo

Razor’s Edge Laser Cutting Inc.

To: Lionel Majors
From: Jobert bermudez
Date: August 20, 2012
Re: Development of Audit Procedures for Razor’s Edge Laser Cutting Inc.

Introduction
The purpose of this memo is to document the development of the audit procedures found

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during the audit engagement with the CFO, Kris Munroe. This will address the risks

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found along with the assertions and the procedures to mitigate those areas.

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Audit Procedures

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Risk:
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The accounts receivable account could possibly be overstated due to
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the aging report of over 90days. They have mentioned that Manley
Mann has not been paying the price based on the invoice but rather
based on the price of steel that it has in its system. The differences
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of those payments have accumulated to a total of $225,000 that is

over 180-days due.
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Assertion: Valuation: To make sure that the value is correct.

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Existence: To make sure that the overstatement is there.

Procedures A subsequent receipt will be necessary to obtain sufficient audit
evidence of its overstatement existence. Since Razor’s Edge Laser
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Cutting Inc.(Razor) has just completed their year end on June 30th,
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there is a possibility of inflation within their financial statements.

Auditors will need to check if there are any differences made prior
to the audit engagement date for any inflation made by management
that could pose risk for material misstatement.
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Risk: The inventory account is overstated due to the accountability of the

accumulated scrap metals made from the cutting machine. Based on
Razor, there is $800,000 worth of scrap metal that are recorded as
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inventory that are unusable. This was due to the cutting machine
inaccurately cutting metals.
Assertion: Valuation: To make sure that the value is correct.
Existence: To make sure that the overstatement is there.
Procedures The audit team will need to observe the procedures of the workers
cutting the metal and what they do with the scrap metals.

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 Recalculating the value of scrap metals found to ensure that the
mentioned value is correct. Verifying with the market value of metal
could also be made to check the validated value of inventory of
metal.

Risk: The impairment of 5% on the patent seems to be incorrectly

validated as it might have been manipulated based on their weak
financial results this year. Management might have decided to
change percentage based on the performance of their financial
statement.
Assertion: Valuation: To make sure that the value is correct.
Procedures The audit team will need to analyze whether the impairment made
was correctly validated. In doing so, they could have an expert of
the patent evaluate how they should move forward in their
impairment.

Risk: There is a risk that Razor could breach their covenant with the bank.

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Their current agreement made with the bank was to maintain a

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minimum current ratio of 1:1 or else their debt borrowed could be

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payable on demand. As shown on their balance sheet, it is currently

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above the current ratio as mentioned. However, with the audit risks

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mentioned above, the overstatement of accounts receivable and
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inventory could drastically reduce their current ratio below the
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minimum.
Assertion: Valuation: To make sure that the value is correct.
Procedures The audit team will need to confirm with Kris whether they will be
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pursuing to demand the balance owing from Manley Mann. This

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will impact whether the balance will be uncollectible or not. Along

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with that could inquire with Kris about their current agreement with
their bank for a possible leeway if there is a breach of covenant.
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Risk: There is a risk for U.S. currency sales not being converted back to
Canadian dollar. As mentioned by Kris, it has not been updated into
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the system for half of the year. The foreign exchange rate could be a
gain or a loss for Razor. This will further impact their agreement
with their bank as mentioned above.
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Assertion: Valuation: To make sure that the value is correct.

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Procedures They will need to recalculate the sales made from U.S. customers
from when they last updated the system. This will require a large
sample to ensure everything is converted. This will also show if
they will have a greater loss on their financial statement.
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