1.

Engagement Risk: The chance that auditors encounter loss of reputation, inability of the client to pay the auditor, or financial loss because management is not honest and inhibits the audit process by being associated with a particular client. Business Risk: Possibility of the outcome of an organizational activities or operations will be successful or not. Audit Risk: The possibility that the auditor expresses an audit opinion that the financial statements are fairly presented when they are materially misstated. Inherent Risk: The chance of a material misstatement before we consider the controls of the company. This can include complexity of an account issue, estimates, and incentives of a company to misstate their numbers. Control Risk: Reflects the possibility that the clients system of controls will allow erroneous items to be recorded and not detected in the ordinary course of processing. 2. Engagement Risk: Due to the fact that BmGs stock is not traded on a US exchange, the company and its subsidiaries are not subject to the provisions of the Sarbanes-Oxley Act of 2002. Since ALI is not subject to the provisions of the Sarbanes-Oxley Act, they do not need to follow requirements to help ensure the independence of public company auditors and do not have required reporting on internal controls over financial reporting. This presents that auditors associated with ALI will encounter a higher risk and possible loss of reputation than a company that has to comply with the Sarbanes-Oxley Act. Business Risk: In order to increase revenues and expand business ALI decided to enter the U.S. aerospace market rather than just deal with their sole customer Bombadier. While pursuing this expansion ALI was making bids to the U.S. aerospace companies for prices 20% less than what was being charged to Bombadier. This is an example of business risk because by offering business at 20% less than what is being charged to their previously sole customer they could potentially lose all business with Bombadier. They will continue to increase revenues until Bombadier finds out what is going on. Once Bombadier finds out what ALI is doing it may critically affect the revenues of ALI if Bombadier decided to cease doing business because of it. This would negatively impact the reputation of ALI making them look as though all they cared about was increased revenue while having no interest in maintaining good relationships with their customers. Inherent Risk: An error is more likely to occur in calculating foreign currency translation amounts than in other areas because they are working with foreign countries and have to constantly deal with currency translation. An area on the financial statements where inherent risk might take place is in sales because as stated in the case, ALI adopted a strategy of submitting bid prices to U.S. manufacturers that, after adjusting for exchange rates, are approximately 20 percent lower than the prices ALI charges to Bombardier. If ALI did not adjust for exchange rates correctly this might hurt their net profit. 3. a. An investment is originally recorded at the cost of the shares acquired but subsequently adjusts the amount each period for changes in the investees net assets. That is, the investors proportionate share of the earnings (losses) of the investee periodically increases (decreases) the investments carrying amount. All cash dividends received by the investor from the investee also decrease the investments carrying amount. b. In instances of significant influence (generally an investment of 20 percent or more), the investor must account for the investment using the equity method. Examples of significant influence may include representation on the board of directors, participation in policy-making processes, material intercompany transactions, interchange of managerial personnel, or technological dependency.

c. ALI should use the equity method for their investment in GlueCo because they acquired 47% interest in GlueCo. Management should have contended that they did exert significant influence. The reason management probably said they did not have significant influence was because they would have to report a loss of $1.4 million. d. The investment in GlueCo account balance should be equal to $3,684,000 ($5,000,000 $1,400,000 * .47 * 2). e. The amount of the misstatement in the investment in GlueCo account is $1.316 million 4. One difficulty in performing an audit test is that the auditors do not have access to examine Exostar. Exostar is a business-to-business website that processed all of ALIs bid submissions and sales transactions with the US aerospace manufacturers. By not having access to this information, the auditors will have to figure out a different way to audit the occurrence of ALIs sales transactions with the US manufacturers. There is possible financial statement misstatement for ALIs assets. ALI should not record 5.5 million in receivable from the insurance company since the insurance company only offered 5.1 million and ALI already received 1.3 million of that 5.1 million. 5. Nothing should be changed because messing with the financial statements is an act of fraud. 6. Yes, because by not communicating with its new board of directors, there is increase in control risk since the board of directors might not know where the revenue is coming from and cannot confirm it.