Your Firm Has Been Appointed as the Auditor of Bush

question 20

Essay

Your firm has been appointed as the auditor of Bush Mining Inc.(BMI),a company that runs small mining operations in remote areas of northern Canada,primarily in surface mines.You have been assigned the job of senior auditor for BMI.
BMI's operations are subject to provincial and federal laws and regulations.These laws and regulations have become stricter in recent years and some of BMI's older mines may be in violation of environmental laws.Surface mining produces tailings (toxic wastes that are dangerous to animal and plant life).These tailings are either further processed and buried or retained in tailings ponds.BMI is required to restore the mining property to a safe condition after a mine is exhausted.BMI has programs in place to monitor and control pollutants that are released to the air and to local waterways.
Required:A)What factors would affect the client business risk of BMI? Based upon your assessment of BMI's client business risk,would you adjust acceptable audit risk? Why or why not? B)What is your preliminary assessment of acceptable audit risk? Justify your answer.

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Definitions:

Beta

A measure of a stock's volatility in relation to the overall market; a beta above 1 indicates higher than market volatility.

Market Risk Premium

The extra return over the risk-free rate that investors require to compensate them for the risk of investing in the stock market.

Risk-free Rate

The return on an investment with no risk of financial loss, often associated with government bonds.

Required Return

The minimum expected yield by investors for providing capital to a company or project.