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Using the Delta Company Ltd. financial statements on the next tab and additional information provided, apply appropriate analytical procedures to identify one or more significant risks of material misstatement that in total, equals or exceeds materiality. You can identify one, or more than one account that you believe contains a significant material error that would add up to or exceed the performance materiality amount set for this client. Provide your one-page WORD document containing the three required elements below;

1. The account(s) you have identified that contains the significant risk and why?

2. The analytical analysis procedures that lead you to conclude the account(s) contain a significant risk of error. Describe the analytical procedure(s) used, what results they provided and what conclusions you draw from the analysis. Provide the detail required to convince the reader.

3. The significant amount ($) of error(s) you believe the account(s) contains and how it compares to the performance materiality set for this audit

Notes:

1. In an effort to increase sales the company increased its advertising budget by 25% over 2020 actual of $300,000. Marketing costs remained constant at $35,000
2. The company has not hired or expects to hire any new employees in the near future. Four employees, earning average of $60,000 per year retired at the end of 020.. future. Four employees earning an average of $60,000 retired in 021.
3. The company continues to invest in new equipment to avoid any business interuption. There have been no dispositions of equipment this year.
4. Distribution costs are directly correlated to shipments which have declined by 10%.
5. The company continues to rent the same facility and employ the same maintenace crew. The landlord increased rent by 7.% and the maintenance cost increased by 20% over the 2020 $200,000 contract.
6. There are no significant changes and no areas of concern or risk.
7. The company's monthly mortgage payment amounts to $300,000 ($25,000 x 12) of principle each year. The accountant was wondering if the full amount should be reported as long-term.
8. The company developed a new process that resulted in increased warehouse productivity and contributed to higher profits. Management decided to increase the value of the recorded goodwill to reflect this new added value to the company as a whole. Since management felt that if the company was sold today the selling price would reflect at least this new increase to goodwill.
9. There have been no significant changes to the insurance and membership expenses included in prepaid expenses.
10. Cash has decreased from year-to-year due to the increase in A/P payments and the lack of collections of A/R.
11. The company has not changed its 30-day credit terms with its customers. There has been changes in the credit department which has delayed the follow up of overdue accounts.
12. The company changed a major supplier at the end of 2020 because their product was causing major functionality issues with our product. In fact there have been significant complaints from some of our customers and two of them have actually confirmed they have contacted their lawyers and will be suing us for a total of $200k each. Our legal councel has confirmed that if it goes to court, we will be found liable and will likely have to pay. Our lawyers stated that we could settle for half the amount if we did it now. Management ahs decided to record the liability in next year's financial statements.
13. The accountant decided not to record a shipment of product that was counted in inventory for $95,690, since the goods were received on the last day of the fiscal year, even though the invoice wasn't received until one week later but is reflected in the next year's A/P. The terms on the invoice stated FOB shipping point.

Bank Covenant: To be in good standing, the bank wants the company to maintain a 1.25:1 current ratio.

Materiality: The auditor set performance materiality at $150,000

Delta Company Ltd. Not sales Cost of goods sold Gross profit (000's) 2021 25.850 15.713 10,137 (000's) 2020 26,985 17,055 9.930 (000's) 2019 27.450 17.303 10.147 Note: - Expenses Marketing and advertising Administrative and Selling salaries Depreciation and amortization Distribution costs Rent and maintenance Insurance expense Administrative and general expenses Total expenses Operating income 579 1,094 930 608 750 100 2,895 6.956 615 1,030 1,130 590 825 100 2.885 7.175 698 1,018 890 573 818 100 2.735 6.832 4 5 8 3,181 2,755 3.315 Interest expense - mortgage Income before taxes Income taxes Net earnings (1,080) 2,101 (532) 1669 (1.104) 1,651 (422) 1.229 (1.127) 2.188 (555) 1633 2021 (000's) 2020 (000's) 2019 (000's) 363 688 Assets Current assets Cash and cash equivalents Trade receivables Inventories Prepaid expenses Total current assets Property, plant, and equipment - net Goodwill Total assets 3,542 2,798 365 7.068 2.662 1,449 413 5.212 1.228 2.627 1.422 393 5.670 10 11 12 9 21,470 750 29.288 20,705 450 26.367 21,518 450 27638 See # 3 9 13 Liabilities Current liabilities Trade payables and accrued liabilities Income taxes payable Short-term note Total current liabilities 1,826 15 1.550 3,391 2,113 23 1.610 3,746 2.197 118 1,679 3,994 7 Long-term debt-mortgage Total liabilities 11,530 14,921 11,830 15,576 12.130 16.124 Shareholders' equity Share capital Retained earnings Total shareholders' equity Total liabilities and shareholders' equity 4,030 10,337 14,367 29,288 3.995 6.796 10.791 26,367 3.918 7,596 11,514 27,638 Delta Company Ltd. Not sales Cost of goods sold Gross profit (000's) 2021 25.850 15.713 10,137 (000's) 2020 26,985 17,055 9.930 (000's) 2019 27.450 17.303 10.147 Note: - Expenses Marketing and advertising Administrative and Selling salaries Depreciation and amortization Distribution costs Rent and maintenance Insurance expense Administrative and general expenses Total expenses Operating income 579 1,094 930 608 750 100 2,895 6.956 615 1,030 1,130 590 825 100 2.885 7.175 698 1,018 890 573 818 100 2.735 6.832 4 5 8 3,181 2,755 3.315 Interest expense - mortgage Income before taxes Income taxes Net earnings (1,080) 2,101 (532) 1669 (1.104) 1,651 (422) 1.229 (1.127) 2.188 (555) 1633 2021 (000's) 2020 (000's) 2019 (000's) 363 688 Assets Current assets Cash and cash equivalents Trade receivables Inventories Prepaid expenses Total current assets Property, plant, and equipment - net Goodwill Total assets 3,542 2,798 365 7.068 2.662 1,449 413 5.212 1.228 2.627 1.422 393 5.670 10 11 12 9 21,470 750 29.288 20,705 450 26.367 21,518 450 27638 See # 3 9 13 Liabilities Current liabilities Trade payables and accrued liabilities Income taxes payable Short-term note Total current liabilities 1,826 15 1.550 3,391 2,113 23 1.610 3,746 2.197 118 1,679 3,994 7 Long-term debt-mortgage Total liabilities 11,530 14,921 11,830 15,576 12.130 16.124 Shareholders' equity Share capital Retained earnings Total shareholders' equity Total liabilities and shareholders' equity 4,030 10,337 14,367 29,288 3.995 6.796 10.791 26,367 3.918 7,596 11,514 27,638