Adam's Family Adventure and Experience Company [2 hours] The Adam's Family Adventure and Experience Park [AFA] was founded by Uncle Fester in 2014 on five acres of land that AFA purchased for $325,000. Located in the Muskoka's, a popular Ontario cottage destination, AFA has been a popular thrill seeking attraction. AFA is privately owned by the Adam's family who are a fixture in the Muskoka area; providing a helping hand in the community whenever asked. In 2017, Uncle Fester stepped away from the day-to-day operations, but AFA continues to be run by the Adam's family, including Morticia and Wednesday. Morticia is the Controller of AFA and Wednesday began the day-to-day head of adventure operations in 2021. AFA also employs numerous other staff. You are the senior accountant working for BBJLLP. Your firm has audited AFA for the past five years, but this is the first time that you have been on the engagement. It is now October 31st, 2021, and AFA has a yearend of December 31st. You and your partner have just come back from a meeting with the client where you were able to obtain information on the year results to date. Your audit partner has asked you to prepare a planning memo for her that includes all regular audit planning activities including your conclusion on the overall audit approach. Your partner has taken care of all pre-engagement activities. In addition to the planning memo, she has also asked you to write five audit procedures - two of the procedures must be test of control procedures. Finally, your partner has also asked you to begin to prepare a draft management letter addressed to the client noting any issues you have seen to date in the information provided. Required: Prepare the information as requested About AFA AFA operates 25 different treetop trekking lines on its property and 10 different zip lines. Customers pay for a ticket for either the treetop trekking or the zip line. There are no discounts if a customer wants to do both on one day. The park operates from April 1st to October 31st of each year. AFA had three buildings on site as of January 1, 2021. The first building is the customer service and park entrance building. Next to this building is a small food facility where customers can purchase snacks and some limited smaller food items. The third building is a large barn sized building which holds all the maintenance equipment for the park. In order to remain competitive, Wednesday decided to market weekend expedition adventures. These adventures are priced as a full weekend adventure. Customers choose from 4 different expeditions. Each one has a minimum of 10 customers before they run. The price includes the use of all the equipment, meals, tents, and seasoned adventure guides. The new adventures began June 1st of this year, running only on the weekends unless specifically negotiated for weekdays. It has proven to be very successful, and corporations have shown tremendous interest in the expeditions as a team building event. Other information can be found in Exhibit #1. Rates for the various activities can be found in Exhibit #2 and selected financial information can be found in Exhibit #3. Exhibit #1 - Other Information AFA has several competitors in the traveling vicinity including Canada's Wonderland and Santa's Village. Both entertainment sites have updated their attractions this year which has put some pressure on AFA to attract customers; Morticia holds monthly meetings with key financial and operations staff. During this meeting she stresses the importance of accurate reporting; Wednesday is in charge of operations including the purchase of any equipment required for the adventure park and the adventure expeditions. With the new expedition venture, Wednesday has been very busy and has asked her assistant Pugsley to take over with some of the purchases. Pugsley currently sources out the equipment, purchases them and submits them directly for payment to Gomez, the payables clerk; Gomez has an accounting background and a diploma in IT. In order to help during busy times, Gomez will often put new vendors in the vendor database so that the invoice processing and payment can happen on time; Toby is the payroll clerk. All employees except for Morticia and Wednesday are required to fill in a timesheet that is signed by their direct supervisor for approval. Toby enters the information into the payroll system which then generates the payroll register. Morticia always examines the payroll register and initials it for approval prior to payment; In order to ensure that they always had the most updated equipment, Morticia signed a lease with 'Things for Rent Inc'. The lease agreement details the equipment leased [canoes, tents, kayaks, rafts] and the length of the lease. There is no ability for AFA to purchase the equipment at the end of they lease; On October 1st, MIA company signed an agreement with AFA for a bundle of expedition adventures for its 20 staff members. The agreement has all 20 members participating in each of the 4 adventures. AFA charged MIA $40,000 for all staff members to complete all 4 adventures. MIA has paid $15,000 upfront for the contract. It is expected that they will complete the white watering rafting in November and the other three adventures will be completed in 2022; In February 2021, Morticia fired Elvira Wisteria, the previous head of day-to-day operations. According to Morticia, Elvira was posting unacceptable comments on her personal Twitter accounts. The comments were made public after they were posted in the local newspaper. In order to avoid a lawsuit and more public information, Morticia relieved Elvira of her duties and paid severance to Elvira. The amount has been recorded as a reorganization cost. Morticia is a bit concerned that Elvira may also have been stealing money by providing a discount to customers who paid cash and then pocketing the case. She has no evidence of this yet however; AFA has very little turnover of staff. Most staff enjoy working at AFA and with Morticia in charge; In July 2021, there was an accident on one of the treetop lines. A customer fell off one of the lines while making their crossing and the safety harness failed to stop them. The customer has sued for $325,000 for injuries suffered in the fall. Morticia noted to you that their lawyers are aware of the lawsuit that was filed. It is expected that nothing will be settled until sometime in 2022. While the lawyers don't believe that there will be an amount of $325,000 paid, they do believe it is likely that AFA will be held liable for an amount somewhere between $100,000 and $200,000; In March 2021, Wednesday oversaw the construction of a fourth building on the AFA site. The building stores the expedition equipment. Wednesday hired a contractor to construct the building which took three months to complete. According to Wednesday, four progress billings were paid to the contractor and the amount of $543,000 was only $25,000 over the original agreed upon price. The overage was due to the installation of a security system. You note that the total amount capitalized for the new building was listed at $578,000 in the general ledger. Morticia notes that household income levels and housing mortgage pressures have put some added pressure on attendance at the park. AFA is looking at some promotions in 2022 with some reduced entrance fees; Morticia wants to ensure that all new employees are a good fit for AFA. To maintain control over this, Morticia must approve all new hires. This is documented on the hiring form that is filled out by the hiring department and forwarded to the payroll department. The payroll department completes the form and then sends to Morticia for approval. Exhibit #2 - Rate Information Adventure Park Rates [per person] Zip line $40 to $65 Tree top treking $40 to $65 Nite trek $60 to $75 Adventure Experiences White water rafting $750 Still water kayaking $500 Hiking excursion $500 Canoe excursion $750 Zip line revenues Tree top trekking revenues Nite Trek revenues White water rafting Still water kayaking Hiking excursion Exhibit #3 - Selected Financial Information 2021 [Unaudited - Period Ending October 31st] $1,400,000 993,000 2020 Audited $1,302,000 880,000 210,000 156,000 126,000 189,000 199,500 Canoe excursion 199,500 Reorganization costs 250,000 Net income 1,028,270 353,740 Property, plant & Equipment 2,345,876 2,267,987 [net]