Appendix A: Cloud $9$ Ltd$.$

W&S Partners is a Canadian accounting firm with offices located in each of the major cities. W&S Partners has just won the December $31,2023,$ statutory audit work for Cloud $9$ Ltd$.$ The audit team assigned to the client is Partner, Jo Wadley; Audit Manager, Sharon Gallagher; Audit Seniors, Josh Thomas and Suzie Pickering; IT Audit Manager, Mark Batten; and Audit Juniors, including Ian Harper, Weijing Fei, and you.

Prior$-$year audits were conducted by Ellis & Associates. As part of the change of audi$-$ tors process, Jo Wadley met with R$.$ J$.$ Ellis $($Managing Partner, Ellis & Associates$)$ to discuss acceptance of Cloud $9$ Ltd$.$ as a client and to inquire about access to Ellis & Associates$$ work papers. In the discussion, R$.$ J$.$ Ellis stated that there were no issues that W&S Partners should be aware of before accepting the client or commencing the work.

Cloud $9$ Ltd$.$ Company Background

Originally founded in $2000$ by Ron McLellan, the Toronto$-$based company was a manufacturer and retailer of customized basketball shoes. In $2013,$ Cloud $9$ Inc. $($a publicly listed Canadian company$)$ purchased the original company from Ron McLellan and renamed it Cloud $9$ Ltd$.$ As part of the sale agreement, Ron McLellan was appointed to the Cloud $9$ Ltd$.$ board of di$-$ rectors.

The parent company, Cloud $9$ Inc., has wholly owned subsidiaries in the United Kingdom, Germany, United States, China, and Brazil, and has built a reputation around the fact that its shoes are comfortable and durable. The company promotes itself using its now well$-$known tagline, $$Our shoes are so comfortable, it$$s like walking on Cloud $9.$ Currently, Cloud $9$ Ltd$.$ is primarily a wholesaler of athletic shoes to its main customers: David Jones, Meyer Sports, Foot Locker, and Rebel Sports.

Cloud $9$ Ltd$.$ receives the majority of its inventory from the production plant in China, with the remainder coming from the United States. All inventory is purchased free on board $($FOB$)$ shipping point, which means Cloud $9$ Ltd$.$ takes ownership of the products once the international courier accepts the goods for delivery. The inventory is sent to the main ware$-$ house in Richmond, B$.$C$.,$ which is linked to retailers through an electronic inventory system. When retail inventory levels get low, the company ensures that deliveries are made using its own transport trucks, thus ensuring control throughout the entire process.

In February $2021,$ Cloud $9$ Ltd$.$ launched its new product line, which included the Heavenly $456$ walking shoe. Advertising campaigns and media coverage have been very successful and sales for this style of shoe have steadily increased. For Cloud $9$ Ltd$.,$ the Heavenly $456$ now makes up $20$ percent of total sales.

A specific marketing campaign was initiated in $2023$ to promote and build the Cloud $9$ brand in Canada. The Canadian company was granted permission from its parent entity to sponsor a new soccer team, the Thompson Thunders, for the $2023$ season. Under this spon$-$ sorship agreement, Cloud $9$ Ltd$.$ is to provide all the athletic footwear for the team, and have sole merchandising rights. The agreement also includes general advertising rights at the stadium.

In a separate contractual arrangement, Cloud $9$ Ltd$.$ has signed Kevin McDonald, the captain of the Thompson Thunders, as spokesperson for the brand. This arrangement allows Cloud $9$ Ltd$.$ to use Kevin$$s image to promote and build the brand in Canada.

To further establish the brand, the first Cloud $9$ retail store was opened in Toronto on June $1,2023.$ The store operates on a just$-$in$-$time inventory system linked with the main

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warehouse in Richmond. However, the management team reports that there have been a few hiccups in determining ideal inventory quantities for the store to allow optimum availabil$-$ ity of merchandise to the customers. There have also been some thefts of merchandise from the store and in order to reduce inventory loss by theft, the company has installed closed$-$circuit television cameras.

Personnel

Cloud $9$ Ltd$.$ has $52$ full$-$time employees. In the retail store, the company employs part$-$time staff, with casual employees enhancing staff levels in the busier retail period.

To administer the company$$s finances, Cloud $9$ Ltd$.$ employs Finance Director David Col$-$ lier, Financial Controller Carla Johnson, and Business Systems Manager Justin Reeves. These three employees are entitled to participate in the employee share purchase plan and receive stock options in Cloud $9$ Inc. if revenue targets are met.

Financial Information

Responding to pressure from its parent company, Cloud $9$ Ltd$.$ set a goal of increasing its rev$-$ enue by $3$ percent for the $2023$ fiscal year. One of the critical success factors for the company achieving this $3-$percent increase is to grow its share of the North American footwear market. However, with the new store ope

Prepare balance sheet for the year $2023$

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