Audit Risks

The pending engagement with ALI presents a high degree of overall audit risk. This risk can be broken down into three sub-categories: inherent, control and detection. Since its takeover by BmG, ALI has been under significant pressure to drastically increase its revenues by 50 percent from 2004 to 2005. ALI’s board of directors has been stacked with BmG executives who are critical of ALI management, threaten replacement for poor financial performance, and even provide an annual “Financial Handbook” which details BmG’s profit expectations. Since the takeover in 2003 the German executive team has scrutinized ALI’s operating results and reminded ALI management that BmG views ALI as an investment that is based on its return to BmG stockholders. Inherent risk measure the auditor’s assessment of the likelihood that there are material misstatements due to error or fraud before considering the effectiveness of internal control. Quite simply, with BmG’s “tone-at-the-top” of profits above all else and the pressure that ALI’s management is under for increasing revenues, there is a high level of inherent risk present with this engagement.

In its quest for drastically increasing revenues in 2005, ALI has developed a new strategy of submitting bid prices to U.S. aerospace manufacturers that are approximately 20 percent lower than the prices it charges Bombardier, its former sole customer prior to the acquisition. BmG’s stock is not traded on a U.S. stock exchange and therefore not subject to the provisions of Sarbanes-Oxley which require management to develop and implement effective internal controls based on well-established criteria. Neither the synopsis nor the exhibits regarding ALI/BmG mention anything about internal control. ALI’s management team has not even discussed its aggressive new strategy with the board of directors believing that the board is more concerned with financial results rather than the means by which they are achieved.