"We have had a fairly good year," said the president of Frankruary Limited. "Sales exceeded $2 million for the first time in our history, though net income didn't keep pace with the sales increase because of higher labour costs."

Frankruary Limited is a Canadian manufacturing com¬ pany. Its factory and most if its sales branches are located in Western Canada, but it also has sales branches and ware¬ house facilities in Toronto, Montreal, and Halifax. The com¬ pany sells a number of industrial products, divided into "Product Line A" and "Product Line B." The industry is highly competitive in both price and quality, and technologi¬ cal developments have been'quite rapid, subjecting most products to a substantial obsolescence risk.

The company's accounting functions are located at the factory; the sales branches and warehouses maintain only payroll, petty cash, and inventory records, which are subject to review by head office. The company's four principal offi¬ cers (the president, the sales manager, the product develop¬ ment manager, and the factory manager) own substantially all of its shares and manage the company in a highly indi¬ vidualistic manner.

Assume that you are the manager in charge of the Frankruary Limited audit. Most of the field work for the 2002 examination has been completed, and the audit senior has presented the working-paper file to you for review. In the file are the following financial statements for the fiscal years ended June 30, 2002, 2001, and 2000. See Exhibit I on pages 425 and 426. (The 2001 and 2000 figures are those reported in

the audited financial statements, but the 2002 figures are those prepared by the chief accountant prior to the audit.)
Required

a. In your review of the audit file of Frankruary Limited for the year ended June 30, 2002, which specific matters shown in the financial statements (other than financial statement presentation) would you be particularly inter¬ ested in investigating before completing the audit?

b. Comment on the company's financial position.

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Frankruary Limited BALANCE SHEETS AS AT JUNE 30 Cash Accounts receivable: Trade 2002 $ 148,000 2001 $ 234,000 387,000 263,000 6,000 2000 $ 210,000 219,000 5,000 Employees 8,000 Income taxes recoverable 10,000 Land sale 130,000 Allowance for doubtful accounts (15,000) (15,000) (15,000) Inventories: Raw material (cost) 69,000 72,000 78,000 Finished goods (standard cost): Product line A 204,000 124,000 Product line B. 166,000 156,000 84,000 149,000 Shop supplies (cost) 23,000 Land (cost) Plant and equipment (cost) Accumulated amortization $ 150,000 1,600,000 (870,000) $ 880,000 $2,010,000 $ 200,000 1,600,000 (800,000) $1,000,000 $ 730,000 $ 200,000 1,600,000 (685,000) $1,115,000 $1,130,000 $ 840,000 Bank loan Accounts payable Trade notes payable Incomes taxes payable Due to shareholder Current portion of mortgage Mortgage (6%)-less current portion Deferred incomes taxes Common share capital Contributed surplus Retained earnings 21,000 8,000 100,000 $1,840,000 $1,845,000 $ 170,000 374,000 97,000 $ 110,000 $ 80,000 304,000 241,000 34,000 9,000 12,000 75,000 60,000 $ 529,000 500,000 68,000 $ 716,000 440,000 71,000 $1,227,000 $ 210,000 50,000 523,000 $ 783,000 $2,010,000 $1,097,000 $ 200,000 50,000 493,000 $ 743,000 $1,840,000 60,000 $ 510,000 560,000 63,000 $1,133,000 $ 200,000 50,000 462,000 $ 712,000 $1,845,000