Ajax and Sons Housing Services Inc

You have been assigned to the audit of Ajax and Sons Housing services Inc. (ASHS) for its year ended December 31, 2022. You are very excited about this opportunity as it is your first assignment since your recent promotion to audit senior and you are anxious to run your own show. Your audit partner has given you the following information.

The company started 5 years ago and is in the business of providing repairs to homes in Greater Sudbury and Surrounding areas. There are 4 main regional managers for Chelmsford & Azilda, The Valley & Garson, Sudbury, and Lively and copper Cliff. The company is owned by Ajax Hitherson and his wife, Donna and her brother, Ajaxs brother-in law Carl. Their two sons, Raymond and Michael have been in the business since its inception as employees. Carl owns 5% of shareholdings but is inactive in the companys day to day operations. He is happy to receive his share of profits in the form of dividends. Donna oversees the financial information but has no formal training. She is a self-taught bookkeeper that used tutorials and you tube to learn how to track revenues and expenses. The audit partner had a quick interview with Donna who had much to say about the day-to-day operations of the business. The conversation was recorded, and the transcription is included in Appendix 1. Ajax has his H.B. Comm from Laurentian University and is familiar with GAAP.

Ajax approached your firm looking to have the books and records audited. While his sons currently get along well, he is concerned about future disagreements on the company if they decide to get married in the future. While they have no ownership of the company now, Ajax plans to include them as equity owners as part of succession within 5 to 10 years. He wants to give his sons some comfort that everything is always checked and is therefore going to be 100% accurate.

He also wonders about the potential for future growth. While the company has proven to be profitable, ASHS is at a crossroads. Michael is moving to Parry sound and would like to start up a satellite location. In order to accomplish this expansion into Parry Sound and surrounding areas it will need a substantial bank loan. In order to qualify for the loan, the bank has requested a current ratio of 2:1 as well as reviewed financial statements. Ajax isnt sure what the bank means by reviewed financial statements, but he is sure an audit will be good enough. ASHS is not sure it wants to take on the risks associated with the rapid expansion; however, it would like to proceed to see if it qualifies for the loan. Afterwards, in the next year they will decide whether they should go forth with expansion.

Raymond, on the other hand is the Wild Child of the family. He is currently single and spends much of his free time at the local bars. He has even been known to splurge on a trip to Vegas every once in a while. He is in charge of ensuring that clients pay their invoices. Some payments are received in the form of cash, others by check and some by Etransfers.

Getting contracts

Contracts are obtained by homeowners looking for repair services. Sales staff will receive a call, go to the site and provide a quote, which must be approved by the manager in charge of that region. That manager can either increase or lower the quote if a competitor undercuts AHSHs quote. Any unanticipated repairs get billed over and above the quote (water damage, mold). A 10% deposit is required before any work begins. Once the work is completed the clients have 10 days to pay the final invoices

Appendix 1: Interview with Donna Audit Partner (AP): Thanks for meeting with me Donna.

Donna: Its great to meet you and I am looking forward to having our books checked out! I am confident everything will be in order. Ajax makes sure to review the records on a monthly basis.

AP: Thats great to hear! So, I just want to gain an understanding of how things operate. In particular for when you receive cash. I hear that Michal takes primary responsibility for this area.

Donna: Yes, thats right, in a way. He is more in charge of ensuring that things clients dont get to far behind in paying. You know how it is, if you let them do it they will do it! Its Ashley, our accounts receivable clerk that does all the hard work. Michael ensures the money gets into the bank, but Ashley is the one who records the cash receipts in the books and records. She is so lovely, although I wonder about her sometimes.

AP: What is it that you wonder about?

Donna: Well, you see, she got this brand-new red shinny corvette a few months ago. Its a bit odd, we dont pay her a lot of money, so I dont see how she can afford it. Anyhow she does her job and is here every day and hasnt taken any vacation in years. She is very dedicated!

AP: Oh, that is very interesting, so what happens after she records the cash receipts?

Donna: Oh yes, I apologize I got a little sidetracked. When she records the cash receipts, she ensures it matches the quote, the sales invoice and the completion order. Any additional expenses outside of the contract are included on the invoice in separate line item. They are also included as notes on the job completion report. So generally, the contract invoices match the quotes, plus the completion order. All outstanding amounts get sent to Michael so he can follow up with collections. Afterwards I prepare a bank reconciliation and Ajax reviews it at the end of the month. I may be self-trained, but those you tube tutorials can be quite handy!

AP: Sounds like you have a good system in place! How does the payment side of transactions work?

Donna: Oh, for that we have George, our accounts payable clerk. Hes got his accounting degree from Cambrian college and started with us a few years ago, I think he is quite happy here. He takes care of writing the checks, recording them in the books and records and signs them. Ajax wants to make sure he knows whats coming out of the accounts, so he has makes sure that every week George gives him a check list detail and he also has to sign the cheques, or they wont be valid. This helps him with his review of the bank reconciliations he does every month. He signs those too, but I think he might have missed July last year, we went on a family trip to Peru! Machu Picchu was quite a spectacular experience!

AP: It sounds like you keep very busy. Thank you for taking the time to talk with me today. I will be in contact with you as soon to discuss the engagement and the next steps. Take Care!

Donna: No problem, you too and talk soon.

Required:

1. The audit partner asks you to draft a list of some discussion points he should have with Ajax and Donna. He really wants to ensure they know what they are getting into in terms of seeking the assurance services in the form of an audit engagement. He wants this to be drafted as if you were the one to speak with the client. He is hopeful that next year, you will be the one having these conversations, so this is a great opportunity to get comfortable talking with clients.

2. You have been assigned the following areas of planning for this engagement:

Assess the firms independence and engagement acceptance

Discuss the impact of the current ratio on materiality for the engagement

Use the audit risk formula to determine detection risk by evaluating internal controls

3. The audit partner also wants you to send him an e-mail right away of any concerns or considerations that he should be made aware of with regards to fraud risks and what your approach would be in discussing these with the client.