MEMORANDUM TO: FROM: DATE: SUBJECT: Ms Tamara Lambert, Partner Lopez & Ryan, LLP March 1, 2008 Risk

of Material Misstatement of Daves Dating Service

The purpose of this memo is to explain how the risk of material misstatement was determined for Daves Dating Service (DDS). This memo will evaluate the inherent risk, control risk and control environment of DDS. Then it will discuss why DDS was determined to have a high risk of material misstatement and the extent to which test procedures will be performed. INHERENT RISK AND CONTROL ENVIRONMENT The inherent risk of DDS is moderate to high due to the tendency for clients to be untruthful. This is a risk that exists without consideration of internal control. The control environment has a moderate to high risk as well because the DDS representatives receive a small bonus when prospective customers are referred to DDS by one of their existing clients. There is motivation for the representatives to encourage prospective customers to join DDS because they will receive compensation for this referral. Since there may be members in the database who do not use or need the service, this could cause the assertions to be misrepresented. Also, the control environment is impacted by the lack of segregation of duties. The representatives record, authorize and input all the data which allows the representatives to skew the information in the DDS database. CONTROL RISK The control risk is high as well. There is a risk that material misstatements can occur and will not be prevented or detected on a timely basis by DDSs internal control. Data may be inaccurate because only 25% of new clients receive background checks. This means that 75% of clients could misrepresent themselves without it being detected by DDS. Therefore the misrepresentation error is high. Data may also be inaccurate due to errors that representatives can make when entering the New Client Information Sheets into the Database. Representatives are the only internal control over the accuracy of data entry. This may result in a high level of entry errors in the database. Existence of clients in the database is also a concern, since representatives have the ability to enter new clients into the system that do not exist in order to increase the numbers in the client database. This results in a fictitious listing error, which may skew the averages and assertions listed in DDSs Form D-1. Finally, omission errors can occur when representatives fail to enter a New Client Information Sheet into the database which causes the assertions to be incomplete. PROCEDURES AND SAMPLE SIZE While testing the demographic information, the assertions the audit team will be focusing on are average age, average income and percentage of persons with advanced degrees. These assertions will be verified for accuracy, existence and completeness. We have determined that the information in the database is susceptible to four types of errors: entry, misrepresentation, fictitious listing, and omission errors. Due to the high risk of material misstatement, the sample size will be 30.