| Course | AC410 Auditing |
|---|---|
| Unit | Unit 2 |
| Paper type | Engagement risk memo |
| Length | About 760 words, 5 pages double-spaced |
| Format | APA 7 student paper |
| School | Purdue University Global |
| Program | BS in Accounting |
| Updated | October 2026 |
Free sample paper for AC410 Unit 2
Estimates Made by People Paid on Margin: A Unit 2 Engagement Risk Memo for a Stair Lift Maker
[Student Name]
Purdue University Global
AC410: Auditing
Unit 2 Engagement Risk Memo
[Instructor Name]
[Date]
Hallcroft Lifts, its people and every figure are composite; the standards, textbook and study cited are real.
Header
To: Engagement partner, Hallcroft Lifts audit From: Audit senior Date: October 6 Subject: Risk assessment for the year ending December 31
Client Profile
Hallcroft designs and assembles straight and curved stair lifts and vertical platform lifts in one plant, selling about $31.6 million a year through roughly 140 independent mobility dealers. Three dealer groups account for 54 percent of sales. Dealers earn volume rebates of 2 to 5 percent, settled after year end. Every lift carries a five-year warranty on motor and drive train, and the reserve stood at $1,140,000 last year. In April the company moved warranty claims into a new module of its enterprise system. Ownership is 65 percent with the chief executive and 35 percent with her brother, who may sell his shares back at a price set from audited equity.
Understanding the entity, its incentives and its systems is the starting point for identifying where material misstatement could arise (American Institute of Certified Public Accountants, 2021).
Inherent Risk by Area
1. Warranty reserve: high. The estimate is large, depends on a claim rate and repair cost per claim, and is set by someone rewarded on margin.
2. Dealer rebate accrual: high. Rates depend on full-year volumes not known until after year end, and the accrual lowers revenue directly.
3. Revenue cutoff: moderate. Lifts ship to dealers in the last week of December, often for January installation.
4. Dealer receivables: moderate. Concentration in three dealer groups makes one failure significant.
5. Inventory: low. Mostly purchased components with stable costs, counted at year end.
The warranty reserve and the rebate accrual are significant risks not only because they are estimates but because the person making the first and the sales team driving the second are both paid in ways that reward a lower figure.
Significant Risks and What They Change
1. Warranty reserve. The plan will test the claim rate and cost per claim against three years of actual claims from the new module and the old system, after confirming the April data conversion was complete. The engagement will develop an independent estimate rather than only reviewing management's. Research on auditing estimates finds that auditors tend to anchor on management's figure, which an independent range helps counter (Griffith et al., 2015).
2. Dealer rebates. Each dealer's year-end volume will be recomputed from shipment data and compared with the rebate tiers, and rebate credits issued in January and February will be traced back to the accrual.
Other Effects on the Plan
Because the warranty module is new, the team will test its controls over claim entry and the conversion of prior claims. The cutoff test will span shipments from December 22 through January 10. Receivable confirmations will cover all three large dealer groups. Each risk is linked to the procedures that answer it, as the standards require (Arens et al., 2020).
Lessons From the Prior Two Years
In the first year of the engagement, the team proposed a $58,000 adjustment to the rebate accrual after a dealer's tier was miscalculated, and management recorded it. Last year the warranty reserve was accepted after review of management's analysis, but the claim rate it used, 2.9 percent of units, was close to the bottom of the range the team considered reasonable. Both points argue for more direct testing this year rather than less, especially because the claim data now comes from a system the team has not yet tested. Neither prior issue was a control deficiency serious enough to report to the owners, but both were discussed with the controller.
Preliminary Materiality
The team expects overall materiality near $96,000, based on normalized pretax income, with performance materiality around $72,000. With roughly 39,000 lifts still under warranty, an error of half a percentage point in the claim rate would move the reserve by more than that figure, which is a further reason to treat it as significant. The full computation follows in a separate workpaper.
Fraud Risk Consideration
The operations vice president's bonus and the brother's buyout price give management both a motive to lower warranty costs and a party who could be harmed. The team will discuss this at the planning meeting and keep the warranty reserve under the partner's direct review.
References
American Institute of Certified Public Accountants. (2021). Statement on Auditing Standards No. 145: Understanding the entity and its environment and assessing the risks of material misstatement. AICPA.
Arens, A. A., Elder, R. J., Beasley, M. S., & Hogan, C. E. (2020). Auditing and assurance services (17th ed.). Pearson.
Griffith, E. E., Hammersley, J. S., & Kadous, K. (2015). Audits of complex estimates as verification of management numbers: How institutional pressures shape practice. Contemporary Accounting Research, 32(3), 833-863. https://doi.org/10.1111/1911-3846.12104
AC410 Unit 2 instructions, in plain terms
The second AC410 unit asks for a memo that profiles a client and rates the risks its business creates. Write it to the engagement partner with a To, From, Date and Subject block. Open with the facts that shape risk: what the client sells, how it earns revenue, who owns it, which estimates it makes and what changed this year. Rate each major area for inherent risk with a one-line reason. Identify the significant risks and explain why they rise above the others, including any incentive behind the numbers. For each significant risk, say what the audit plan will do differently. Note prior-year adjustments, preliminary materiality and the fraud risk discussion the team must hold. Cite the AICPA risk assessment standard, a textbook and one study on how auditors handle estimates, in APA 7.
How the AC 410 Unit 2 example is put together
The header addresses the engagement partner from the audit senior. The client profile covers Hallcroft's plants, dealers, rebate tiers, five-year drive-train warranty, the April system change and its split ownership, citing SAS 145. Five areas follow in a numbered list rated from high to low, with inventory the only low rating. The highlighted sentence explains that both significant risks are estimates made by people paid to keep them low. The section on significant risks sets an independent estimate of the claim rate and a full recomputation of rebates, citing Griffith and colleagues on anchoring. Other effects on the plan cover the new module's controls, a cutoff window and confirmations. Two prior-year issues, a $58,000 rebate adjustment and a claim rate near the bottom of the range, argue for more testing. Materiality near $96,000 and a fraud paragraph close the memo.
AC410 Unit 2 rubric: what earns full points
AC410 risk memos earn their points for linking facts about the client to specific risks and then to specific audit responses. A profile that lists generic facts without saying why they matter earns little. Each area should carry a rating and a reason, and the significant risks must be justified rather than declared. Explaining the incentive behind an estimate, such as a bonus tied to margin, shows the fraud awareness graders look for. The plan section must say what changes, with procedures specific enough to test. Prior-year results and system changes count as risk factors and should be used. Preliminary materiality belongs in the memo but need not be computed in full. Professional memo format and correct references to the risk assessment standard and the textbook round out what Purdue Global marks in the second unit.
Common AC410 Unit 2 mistakes, and how to avoid them
Many Unit 2 memos rate every area high, which tells the partner nothing about where to spend the hours. Others describe the client at length and never reach the plan. Significant risks are named without the reason they are significant, or revenue is listed only because the textbook says so. Incentives are missed, especially bonuses tied to the very figures under estimate. A new information system is mentioned without asking whether the data it holds can be trusted. Prior-year adjustments are left out. The memo cites standards by number with no application. If your case company is a retailer, a hospital or a nonprofit, our writers can draft the profile, ratings and plan responses for that client's own risks.
Get an AC410 Unit 2 example written to your instructions
Attach the client description your Unit 2 case provides, any financial data or industry notes, and the rubric. Ratings, significant risks and the engagement-level view come back within 24-48h, each tied to a fact in your case rather than to the casework maker. You pay nothing for a first custom sample. The paper above is an original model document written by our desk, not a submitted student paper and not an official Purdue University Global document.
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AC410 Unit 2 questions, answered
Where can I find a free AC410 Unit 2 sample paper?
This page holds a complete AC410 Unit 2 engagement risk memo for a composite stair lift maker, with a client profile, five risk ratings, two significant risks, plan changes and APA 7 references.
Why are the warranty reserve and rebates significant risks in AC410 Unit 2?
Both are estimates, both are large, and both are set by people paid in ways that reward a lower figure: the operations vice president on gross margin and the sales team on dealer volume.
What does the AC410 Unit 2 memo change in the audit plan?
It replaces review of management's warranty analysis with an independent estimate built from three years of claims, recomputes every dealer's rebate, tests the new warranty module and widens the cutoff window.
Why does a new warranty system raise risk?
The reserve estimate rests on claims data, and claims moved into a new module in April. If the conversion dropped or duplicated claims, every rate computed from that data is wrong, so the conversion must be tested first.
How do prior-year results affect the AC410 Unit 2 risk ratings?
A $58,000 rebate adjustment in year one and a claim rate near the bottom of the accepted range last year both argue for more direct testing this year, not less.