Audit and Assurance

Green Grocers Inc. (GGI) is located in Windsor, Ontario and is owned 100% by Ray. The grocery store has seen huge growth in profits quarter over quarter since it opened in 20X2. Ray is surprised that results in the last quarter have been worse than he expected, especially because the Windsor economy has been booming in the last year.

It is now January 5, 20X7, and you have been assigned to the December 31, 20X6 year-end audit of GGI in your role as a Senior Auditor at Dhaliwal & Co. CPAs. You have recently taken over from Liling, who was the auditor at your firm in charge of the GGI audit until she went on maternity leave. GGI has not yet prepared financial statements for its December 31 year end. In reading through the prior-year files, you have discerned that the audits have typically gone smoothly in the past.

Jean-Pierre has been the grocery manager of GGI since the store opened. Ray has been relying on Jean-Pierre to run the store more heavily since the summer months and thinks that Jean-Pierre is a solid choice for taking over his store. Ray first pitched Jean-Pierre the idea of buying Ray?s shares in early July, after the end of the second quarter. Ray added Jean-Pierre as a signing officer on GGI?s bank account so he is also able to sign cheques, because Ray is frequently away from the store. Ray is keen to retire and sell his shares in the next year. Jean-Pierre told Ray that he is interested in purchasing the shares pending the current-year fiscal results, but that he is concerned about getting the best possible price for the GGI shares. Similar privately-held grocery stores in Ontario have typically sold for five times operating earnings before tax. Ray has given Jean-Pierre a draft purchase and sale agreement with the shares? selling price outlined at five times operating earnings before tax.

GGI?s controller resigned at the end of September 20X6 to take another job. With no controller, most accounting tasks have been delegated to Jean-Pierre?s son, Brandon, who just finished his first accounting course at a local community college. Brandon told Ray that he likes to work because his parents are always away travelling and are never home. Ray feels lucky that Brandon can help because no one else at GGI has any accounting expertise. Brandon has been dating your cousin for the last six months. You remember meeting him at Thanksgiving dinner in October.

On December 31, 20X6, you visited Ray at GGI. During your visit, you walked through the store to become familiar with the premises. You made some notes of your observations during your visit, which can be found in Exhibit 1. Notes from your meeting with Ray can be found in Exhibit 2.

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Audit and Assurance Project

In October 20X6, during the interim audit, Liling updated her understanding of controls and performed interim procedures. Excerpts from the interim audit file can be found in Exhibit 3.

Exhibit 1: Notes from December 31 visit to GGI

You noticed that there was a large pallet of inventory by the receiving door in the back room where goods from suppliers are delivered. You overheard one of the clerks tell a younger staff member, ?Don?t unpack that order. If we unpack it, we have to count it in inventory tomorrow when the store is closed, so just leave it for now.?

You overhead a conversation where one employee asked another to punch out for him because he had to leave early. The punch card reader is right next to the break room. Each employee has a cardboard punch card that they use to punch in at the beginning of their shift and punch out at the end of the shift. Punch cards are reviewed by the department managers when they have time.

You were waiting to speak with the head cashier, Brenda, when you overheard her tell another cashier not to worry about counting the cash at her cash register before the start of her shift because they were too busy and it would take too much time. Brenda counts the cashiers? tills at the end of their shifts and prepares the deposit for the bank.

GGI policy states that every new cashier hired is on probation for the first three months of their employment. A cashier will receive a violation notice if their cash register is either short or over by more than $5.00 per shift. Liling?s notes from the interim audit indicate that she was surprised by the number of violations that are just below the $5.00 mark. Brenda supervises all cashiers and handles any personnel matters with them directly.

Before leaving the store after your visit, you were waiting to pay for your lunch when another cashier took over for the one originally ringing in groceries at your checkout. You noticed that the original cashier did not log out of her register when the replacement took over.

Exhibit 2: Notes from meeting with Ray about significant events during the period

Ray is surprised that customers are sometimes willing to pay 1.5 times the price of non-organic produce, for organic produce. He was advised by Jean-Pierre that staff sometimes label produce as being organic in error.

GGI received a $10,000 government grant in May 20X6 to cover the payroll costs incurred for hiring summer students in the summer of 20X6. Ray mentioned that Brandon set up the government grant as deferred revenue because he was advised to do so by Jean-Pierre and that they may hire summer students again next summer.

Ray noted that the store looked better than ever after it had been cleaned up following a flood in early August 20X6. The flooring and some shelving had to be replaced, which unfortunately was not covered by insurance.

GGI sells an extensive variety of health supplements, such as vitamins and protein powder. The lifespan of these products ranges from two to six months. Sales of the supplements accounted for a significant portion of revenue during the year.

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Audit and Assurance Project

In September 20X6, MAGG, a manufacturer in the United States, recalled several batches of its health supplements sold by GGI due to possible contamination with salmonella. MAGG has since gone out of business.

GGI stocks Nature?s Best for Your Pet (NBYP) dog food, which is manufactured by a local producer operating in Kitchener. GGI has an agreement with NBYP, launched in May 20X6, that states that GGI gets a commission of 25% on the sale of NBYP products in its stores in return for a set amount of shelf space and a minimum purchase commitment per month for a set amount of dog food from NBYP. Any dog food not sold within three months of delivery is returned to NBYP. NBYP pays GGI the required commission every quarter based on sales GGI reports to NBYP. GGI just waits until it gets paid by NBYP to make an accounting entry for the commission. The NBYP product is kept in the same warehouse as GGI?s grocery inventory.

GGI has recently started ordering products such as flour and sugar directly for Sweet Treats, a bakery owned by Nousha in a neighbouring town. This allows Sweet Treats to take advantage of volume discounts received by GGI, and to avoid paying higher shipping costs. Nousha recently complained to Ray about being charged for product she never received from GGI. She said she paid all of her bills in the past but is frustrated and feels that GGI owes her money for products she did not receive. When Ray tried to investigate the payment history from Sweet Treats, he couldn?t find any records of the deposits for the invoices in question. Ray asked Jean-Pierre for more information about this, but Jean-Pierre always seems to be unavailable or at a conference out of town. He has been doing a lot of travelling in the last month.

GGI has an agreement with a large farm in Southern Ontario that gives GGI a rebate of 10% on purchases of beef as long as volume reaches a certain level. Volumes have been met, and in fact have increased every quarter since the agreement was signed. This rebate is paid to GGI in the quarter following purchases. GGI has always recorded this discount as a credit to cost of goods sold and a debit to accounts payable as each purchase is made. From what you can tell, this discount has not been recorded this year. When you asked Ray about his, he told you that Jean-Pierre instructed Brandon to wait until after year end, when the discount is received, to make the journal entry because GGI doesn?t know for certain that they will receive it.

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Audit and Assurance Project

Exhibit 3: Excerpts from interim audit work

The interim audit file includes the following notes:

Risk of material misstatement is assessed as low because GGI is a repeat client with consistent income and no change in circumstances from the prior period.

Materiality has been calculated based on 10% of income after taxes because Ray is the only user of the audited financial statements.

Liling believes that a combined approach should be used based on the fact that historically the audit of GGI has gone smooth.

Financial statements for the nine-month period ended September 30, 20X6 are provided in Exhibit 4. The following procedures were performed at interim by Liling before she went on maternity leave:

The $10,000 grant deposit from the government was traced to the bank statement to ensure accuracy of the amount. No further work was done.

Purchases were confirmed for major suppliers at September 30, 20X6. A sample was chosen by reviewing the accounts payable listing and choosing the highest amounts. This will ensure completeness of accounts payable. The payable balance will be updated to December 31 through roll-forward procedures during year end.

Occurrence of revenues was tested by tracing revenues recorded in the subledger and tracing them to the general ledger.

Completeness of rebates from vendors (separate from the Southern Ontario farm) who provide them was verified by multiplying total purchases by the rebate amount of 1%. Amounts agree, so no further work is required. Rebates last year were $31,200.

Liling discussed the loss from the uninsured flood in the store with Jean-Pierre. Per Jean-Pierre, the loss represents the cost of goods that were damaged. Jean-Pierre also stated that the net book value (cost less accumulated amortization) of the floors is difficult to measure because they were originally recorded as part of the building. This is a reasonable explanation, so no further work was done.

No further work is required on expenses that had not changed more than 5% as compared to the prior period. For amounts in excess of 5%, explanations were sought from management. Jean-Pierre noted that some expenses had increased due to the poor economy. This explanation is reasonable, so no further work is required.

GGI had a small amount of inventory on hand from MAGG, only some of which was from the recalled batches. Brandon advised Liling that, based on instructions from Jean-Pierre, he expensed all health supplement inventory due to the recall. A total amount of $25,000 was expensed in cost of goods sold. Journal entry was traced from subledger through to general ledger. No further work is needed.

The bank agreement in the permanent file was reviewed. The line of credit amount is tied to 75% of inventory amounts at year end. There are no changes to the bank agreement from prior period per Ray. No further work is needed.

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Audit and Assurance Project

Exhibit 4: Excerpts from financial statements as at September 30, 20X6 and December 31, 20X5

Green Grocers Inc.

Income Statement

					For the year
	For the nine months			ending
	ending September 30,	December 31,
			20X6			20X5
	unaudited	audited
Sales	3,880,000	4,320,000
Cost of goods sold	3,142,800		3,240,000
Gross margin	737,200	1,080,000
Expenses
Salaries and wages	495,250	635,000
Promotion and travel expense	38,000		28,000
Rent expense	99,000		132,000
Loss from flood	40,000				?
Miscellaneous expense		22,000			18,000
Total expenses	694,250	813,000
Income before tax	42,950		267,000
Income tax expense (Note 1)		6,657			41,385
Net income	36,293		225,615

Note 1: Tax rate is 15.5% for 20X5 and 20X6.

Required:

Perform the planning analytical review for the financial statements of GGI, analyzing the key movements. Include all supporting calculations. (As part of your analytical review, based on the results of this review, indicate the assertion(s) that your audit procedures will focus on along with a brief explanation of the assertion.) Hint: Ensure that you annualize the balances from September 30, 20X6 in order to perform your analysis. (12 marks)

Identify any control weaknesses present at GGI, noting the implication of the weakness and your recommendations for improvement. Present these items in a table with the following column headings: ?Weakness,? ?Implication? and ?Recommendation.? (20 marks)

Provide an assessment of risk of material misstatement, approach and materiality for the year-end audit comparing to the initial assessment prepared by Liling. (16 marks)

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Audit and Assurance Project

Evaluate the audit procedures performed by the former auditor, Liling, at the interim stage of the audit. Outline additional procedures that should be performed by the audit team based on your review of her work (and the related assertion). (24 marks)

Identify any additional areas of concern/ high-risk areas that were not examined at the interim stage of the audit. Design an audit procedure to provide assurance over the assertion in question for the audit risks identified. Set up your response in a column as follows ?Issue causing concern,? ?Specific procedure to test? and ?Assertion tested.? Be specific; marks will not be awarded for generic audit procedures. (18 marks)

Provide an analysis of whether or not an independence threat exists given your relationship with Brandon. Consider what type of threat may exist as well as ways to mitigate the threat. Provide an overall conclusion. (4 marks)

7 / 7

Audit and Assurance Green Grocers Inc. (GGI) is located in Windsor, Ontario and is owned 100% by Ray. The grocery store has seen huge growth in profits quarter over quarter since it opened in 20X2. Ray is surprised that results in the last quarter have been worse than he expected, especially because the Windsor economy has been booming in the last year. It is now January 5, 20X7, and you have been assigned to the December 31, 20X6 year-end audit of GGI in your role as a Senior Auditor at Dhaliwal & Co. CPAs. You have recently taken over from Liling, who was the auditor at your firm in charge of the GGI audit until she went on maternity leave. GGI has not yet prepared financial statements for its December 31 year end. In reading through the prior-year files, you have discerned that the audits have typically gone smoothly in the past. Jean-Pierre has been the grocery manager of GGI since the store opened. Ray has been relying on Jean-Pierre to run the store more heavily since the summer months and thinks that Jean-Pierre is a solid choice for taking over his store. Ray first pitched Jean-Pierre the idea of buying Ray's shares in early July, after the end of the second quarter. Ray added Jean-Pierre as a signing officer on GGI's bank account so he is also able to sign cheques, because Ray is frequently away from the store. Ray is keen to retire and sell his shares in the next year. JeanPierre told Ray that he is interested in purchasing the shares pending the current-year fiscal results, but that he is concerned about getting the best possible price for the GGI shares. Similar privately-held grocery stores in Ontario have typically sold for five times operating earnings before tax. Ray has given Jean-Pierre a draft purchase and sale agreement with the shares' selling price outlined at five times operating earnings before tax. GGI's controller resigned at the end of September 20X6 to take another job. With no controller, most accounting tasks have been delegated to Jean-Pierre's son, Brandon, who just finished his first accounting course at a local community college. Brandon told Ray that he likes to work because his parents are always away travelling and are never home. Ray feels lucky that Brandon can help because no one else at GGI has any accounting expertise. Brandon has been dating your cousin for the last six months. You remember meeting him at Thanksgiving dinner in October. On December 31, 20X6, you visited Ray at GGI. During your visit, you walked through the store to become familiar with the premises. You made some notes of your observations during your visit, which can be found in Exhibit 1. Notes from your meeting with Ray can be found in Exhibit 2. 2/7 Audit and Assurance Project In October 20X6, during the interim audit, Liling updated her understanding of controls and performed interim procedures. Excerpts from the interim audit file can be found in Exhibit 3. Exhibit 1: Notes from December 31 visit to GGI You noticed that there was a large pallet of inventory by the receiving door in the back room where goods from suppliers are delivered. You overheard one of the clerks tell a younger staff member, \"Don't unpack that order. If we unpack it, we have to count it in inventory tomorrow when the store is closed, so just leave it for now.\" You overhead a conversation where one employee asked another to punch out for him because he had to leave early. The punch card reader is right next to the break room. Each employee has a cardboard punch card that they use to punch in at the beginning of their shift and punch out at the end of the shift. Punch cards are reviewed by the department managers when they have time. You were waiting to speak with the head cashier, Brenda, when you overheard her tell another cashier not to worry about counting the cash at her cash register before the start of her shift because they were too busy and it would take too much time. Brenda counts the cashiers' tills at the end of their shifts and prepares the deposit for the bank. GGI policy states that every new cashier hired is on probation for the first three months of their employment. A cashier will receive a violation notice if their cash register is either short or over by more than $5.00 per shift. Liling's notes from the interim audit indicate that she was surprised by the number of violations that are just below the $5.00 mark. Brenda supervises all cashiers and handles any personnel matters with them directly. Before leaving the store after your visit, you were waiting to pay for your lunch when another cashier took over for the one originally ringing in groceries at your checkout. You noticed that the original cashier did not log out of her register when the replacement took over. Exhibit 2: Notes from meeting with Ray about significant events during the period Ray is surprised that customers are sometimes willing to pay 1.5 times the price of nonorganic produce, for organic produce. He was advised by Jean-Pierre that staff sometimes label produce as being organic in error. GGI received a $10,000 government grant in May 20X6 to cover the payroll costs incurred for hiring summer students in the summer of 20X6. Ray mentioned that Brandon set up the government grant as deferred revenue because he was advised to do so by Jean-Pierre and that they may hire summer students again next summer. Ray noted that the store looked better than ever after it had been cleaned up following a flood in early August 20X6. The flooring and some shelving had to be replaced, which unfortunately was not covered by insurance. GGI sells an extensive variety of health supplements, such as vitamins and protein powder. The lifespan of these products ranges from two to six months. Sales of the supplements accounted for a significant portion of revenue during the year. 3/7 Audit and Assurance Project In September 20X6, MAGG, a manufacturer in the United States, recalled several batches of its health supplements sold by GGI due to possible contamination with salmonella. MAGG has since gone out of business. GGI stocks Nature's Best for Your Pet (NBYP) dog food, which is manufactured by a local producer operating in Kitchener. GGI has an agreement with NBYP, launched in May 20X6, that states that GGI gets a commission of 25% on the sale of NBYP products in its stores in return for a set amount of shelf space and a minimum purchase commitment per month for a set amount of dog food from NBYP. Any dog food not sold within three months of delivery is returned to NBYP. NBYP pays GGI the required commission every quarter based on sales GGI reports to NBYP. GGI just waits until it gets paid by NBYP to make an accounting entry for the commission. The NBYP product is kept in the same warehouse as GGI's grocery inventory. GGI has recently started ordering products such as flour and sugar directly for Sweet Treats, a bakery owned by Nousha in a neighbouring town. This allows Sweet Treats to take advantage of volume discounts received by GGI, and to avoid paying higher shipping costs. Nousha recently complained to Ray about being charged for product she never received from GGI. She said she paid all of her bills in the past but is frustrated and feels that GGI owes her money for products she did not receive. When Ray tried to investigate the payment history from Sweet Treats, he couldn't find any records of the deposits for the invoices in question. Ray asked Jean-Pierre for more information about this, but JeanPierre always seems to be unavailable or at a conference out of town. He has been doing a lot of travelling in the last month. GGI has an agreement with a large farm in Southern Ontario that gives GGI a rebate of 10% on purchases of beef as long as volume reaches a certain level. Volumes have been met, and in fact have increased every quarter since the agreement was signed. This rebate is paid to GGI in the quarter following purchases. GGI has always recorded this discount as a credit to cost of goods sold and a debit to accounts payable as each purchase is made. From what you can tell, this discount has not been recorded this year. When you asked Ray about his, he told you that Jean-Pierre instructed Brandon to wait until after year end, when the discount is received, to make the journal entry because GGI doesn't know for certain that they will receive it. 4/7 Audit and Assurance Project Exhibit 3: Excerpts from interim audit work The interim audit file includes the following notes: Risk of material misstatement is assessed as low because GGI is a repeat client with consistent income and no change in circumstances from the prior period. Materiality has been calculated based on 10% of income after taxes because Ray is the only user of the audited financial statements. Liling believes that a combined approach should be used based on the fact that historically the audit of GGI has gone smooth. Financial statements for the nine-month period ended September 30, 20X6 are provided in Exhibit 4. The following procedures were performed at interim by Liling before she went on maternity leave: The $10,000 grant deposit from the government was traced to the bank statement to ensure accuracy of the amount. No further work was done. Purchases were confirmed for major suppliers at September 30, 20X6. A sample was chosen by reviewing the accounts payable listing and choosing the highest amounts. This will ensure completeness of accounts payable. The payable balance will be updated to December 31 through roll-forward procedures during year end. Occurrence of revenues was tested by tracing revenues recorded in the subledger and tracing them to the general ledger. Completeness of rebates from vendors (separate from the Southern Ontario farm) who provide them was verified by multiplying total purchases by the rebate amount of 1%. Amounts agree, so no further work is required. Rebates last year were $31,200. Liling discussed the loss from the uninsured flood in the store with Jean-Pierre. Per JeanPierre, the loss represents the cost of goods that were damaged. Jean-Pierre also stated that the net book value (cost less accumulated amortization) of the floors is difficult to measure because they were originally recorded as part of the building. This is a reasonable explanation, so no further work was done. No further work is required on expenses that had not changed more than 5% as compared to the prior period. For amounts in excess of 5%, explanations were sought from management. Jean-Pierre noted that some expenses had increased due to the poor economy. This explanation is reasonable, so no further work is required. GGI had a small amount of inventory on hand from MAGG, only some of which was from the recalled batches. Brandon advised Liling that, based on instructions from Jean-Pierre, he expensed all health supplement inventory due to the recall. A total amount of $25,000 was expensed in cost of goods sold. Journal entry was traced from subledger through to general ledger. No further work is needed. The bank agreement in the permanent file was reviewed. The line of credit amount is tied to 75% of inventory amounts at year end. There are no changes to the bank agreement from prior period per Ray. No further work is needed. 5/7 Audit and Assurance Project Exhibit 4: Excerpts from financial statements as at September 30, 20X6 and December 31, 20X5 Green Grocers Inc. Income Statement Sales Cost of goods sold Gross margin For the nine months ending September 30, 20X6 unaudited 3,880,000 3,142,800 737,200 For the year ending December 31, 20X5 audited 4,320,000 3,240,000 1,080,000 Expenses Salaries and wages Promotion and travel expense Rent expense Loss from flood Miscellaneous expense Total expenses 495,250 38,000 99,000 40,000 22,000 694,250 635,000 28,000 132,000 18,000 813,000 Income before tax Income tax expense (Note 1) Net income 42,950 6,657 36,293 267,000 41,385 225,615 Note 1: Tax rate is 15.5% for 20X5 and 20X6. Required: 1 Perform the planning analytical review for the financial statements of GGI, analyzing the key movements. Include all supporting calculations. (As part of your analytical review, based on the results of this review, indicate the assertion(s) that your audit procedures will focus on along with a brief explanation of the assertion.) Hint: Ensure that you annualize the balances from September 30, 20X6 in order to perform your analysis. (12 marks) 2 Identify any control weaknesses present at GGI, noting the implication of the weakness and your recommendations for improvement. Present these items in a table with the following column headings: \"Weakness,\" \"Implication\" and \"Recommendation.\" (20 marks) 3 Provide an assessment of risk of material misstatement, approach and materiality for the year-end audit comparing to the initial assessment prepared by Liling. (16 marks) 6/7 Audit and Assurance Project 4 Evaluate the audit procedures performed by the former auditor, Liling, at the interim stage of the audit. Outline additional procedures that should be performed by the audit team based on your review of her work (and the related assertion). (24 marks) 5 Identify any additional areas of concern/ high-risk areas that were not examined at the interim stage of the audit. Design an audit procedure to provide assurance over the assertion in question for the audit risks identified. Set up your response in a column as follows \"Issue causing concern,\" \"Specific procedure to test\" and \"Assertion tested.\" Be specific; marks will not be awarded for generic audit procedures. (18 marks) 6 Provide an analysis of whether or not an independence threat exists given your relationship with Brandon. Consider what type of threat may exist as well as ways to mitigate the threat. Provide an overall conclusion. (4 marks) 7/7