Apple Cider Inc. (ACI) is a cider producer located in Toronto, Ontario. ACI is a privately held company owned by two sisters, Mia and Morgan. ACI has been approach by Ace Beverages (Ace), a large public company that is interested in purchasing ACI. Ace requires ACI to have its December 31, Year 1, financial statements audited before they negotiate a deal.

Since the sisters are interested in selling, they have engaged Barry & Jenson CPAs (B&J) to conduct this first-time audit. It is November 25, Year 1, and an audit manager with B&J is completing the planning section of the audit for ACI's December 31, Year 1, year end. ACI has three main revenue streams: shipments to the Liquor Control Board of Ontario (LCBO), shipments to restaurants, and sales directly to customers. The inventory warehouse where orders are shipped from and the storefront are located in the same building. Mia takes care of the day-to-day management of the storefront and inventory operations, while Morgan is in charge of the accounting and taxes for the company. ACI has 13 full-time employees. When asked about the working environment and policies at ACI, Mia mentioned that all employees are honest people whom she has known for several years, and no code of conduct or policies have been formally adopted. She added that all employees are well trained in both the storefront and inventory operations, as employees often change roles depending on their schedules and the needs in those areas. 

Morgan had surgery in early October, which put her off work until the new year. The store manager, Juhie, has stepped in to do the bookkeeping. Morgan has taken a few accounting courses over the years, but neither Morgan nor Juhie has a CPA designation. All bookkeeping is done on site on the company computer and is done in Excel. The company computer is used by all staff members for a variety of activities. 

Recently, there has been an economic slowdown in the food and beverage industry, which has decreased ACI's ability to collect accounts receivable from the restaurants on time. There is no formal credit check review process for restaurants. Additionally, while Morgan was on leave, there was no one available to follow up on the outstanding balances. There has been no allowance for doubtful accounts recorded. 

ACI purchases raw materials from a variety of vendors. All employees have the ability to issue purchase orders for materials, as required, without approval. Raw materials are received in the inventory warehouse, where an employee receives the bill of lading and files it away. When the supplier invoice is received, this is given to Morgan or Juhie to be paid. Payments can be authorized by Juhie, Mia, or Morgan. During Year 1, Juhie paid most invoices, but she has been known to accidentally pay invoices twice. Although ACI uses a perpetual inventory system, no formal inventory counts ever take place. 

Required: 

a) Assess inherent and control risks (the RMM) at the overall financial statement level. 

 

b) Assess inherent and control risks at the assertion level. 

 

c) Conclude on the RMM and recommend an audit approach.