Boss Lid is an owner-managed machinery manufacturer that specializes in producing small electric utility tractors for commercial use in London, England. Jack Boss, the sole shareholder, started the business in 2012; his son, Andrew Boss, is the controller. Boss recently won a bid from a large client. To ensure that BOSS LTD can deliver this large order, the new client wants to review the audited financial statements before finalizing the contract. They have indicated that they are interested in seeing the extent of BOSS LTD revenue. You are an associate articling with the firm of Ron & Harry, Chartered Professional Accountants (RH). BOSS LTD has recently engaged RH as the auditor for the company. In prior years, BOSS LTD's financial statements were audited by a local public accounting firm. Emma White, the partner responsible for the file, has already dealt with all client acceptance issues. details. It is now October 31, 2019. You are meeting with Emma, who provides you with the following Emma Here are the draft September 30, 2019, financial statements (Exhibit I). I met with Jack and Andrew Boss last week to discuss the audit; here are my meeting notes, with some general information about BOSS LTD_(Exhibit II). I would like you to prepare the audit planning memo for this new client. Please ensure that the overall financial statement risk, materiality determinations, and the preliminary analytical review of the financial statements are included. Your analysis should tie into the key accounts and assertions impacted. You do not have to provide audit procedures based on your analysis, as I will do that myself. As inventory is BOSS LTD's largest asset, another associate, Mark, attended the inventory count on September 30. He has documented his observations of the count and the procedures he performed (Exhibit III). I would like you to develop the follow-up audit procedures we will perform for each key inventory account assertion. As well, I would like you to review Mark's observations of the count and identify the risks and control improvements related to inventory count procedures that we will communicate to the client. Mark has already sent out the accounts receivable and legal confirmations. Here is a summary of the results (Exhibit IV). He didn't have time to discuss the results with the client, so you will have to do all of the follow-up work. If you identify any potential adjustments to the financial statements, please prepare them, so I can add them to the summary of identified misstatements. Also please explain what audit procedures you will perform related to the accounts receivable and legal confirmation results.Exhibit I Boss Ltd. Comparative Financial Statements As at September 30, 2019 BALANCE SHEET 2019 2018 (Draft) (Audited) ASSETS Current assets: Cash E 80,938 47,889 Short-term investments 80,000 30,000 Accounts receivable 237,564 174,567 Prepaid expenses 19,743 13,776 Inventory 764,970 531,343 1,183,215 797,575 Property, plant, & equipment 300,766 330,889 1,483,981 1,128,464 LIABILITIES AND SHAREHOLDER'S EQUITY Current liabilities: Accounts payable and accruals 236,515 370,998 Income taxes payable 40,075 30,087 Current portion of note payable 30,000 30,000 306,590 431,085 Bank loan 200,000 230,000 Other liabilities (Note 1) 155,000 67,000 661,590 728,085 Shareholder's equity 100 100 Retained earnings 822,291 400,279 822,391 400,379 E 1,483,981 E 1,128,464 Notes: Note 1 - This includes contingent liabilities.Exhibit I (continued) Boss Ltd. Comparative Financial Statements As at September 30, 2019 STATEMENT OF INCOME 2019 2018 Draft) Audited) Revenue E 3,500,000 E 3,115,400 Cost of goods sold 1,437,900 1,414.419 Gross profit 2,062, 100 1,700,981 Expenses: Advertising & promotion 25,745 19,876 Amortization 30,123 34.567 Automobile 24,000 24,000 Insurance 20,983 22,567 Interest on notes payable 12,564 14.653 Office & supplies 45,876 42,345 Professional fees 47,899 25,876 Repairs & maintenance 62,899 123,459 Salaries 1,190,345 987,543 Travel 8,675 4,981 Utilities 147,678 124,984 1,616,787 ,424,851 Income before taxes 445,313 276,130 Gain(loss) on investments 6,786 2,564 Income taxes 30,087 24,765 Net income after tax E 422.012 E 253,929Exhibit I (continued) Boss Ltd. Comparative Financial Statements As at September 30, 2019 STATEMENT OF RETAINED EARNINGS 2019 2018 (Draft) (Audited) Net income after tax E 422,012 E 253,929 Retained earnings, opening 400,279 146,350 Retained earnings, closing E 822,291 E 400,279Exhlblt ll Boss Ltd. Meeting Minutes (Prepared by Emma White. CPA) Since Its Inception in 2012. BOSS LTD has had Increasing income. Peter is involved In all aspects of the business. He negotiates prices for parts with the suppliers. ensures that manufacturing ot the tractors Is up to standards. is Involved in the hiring of employees. and reviews the nancial statements. Andrew Boss is a CPA: he joined his father in the business in 2016. when he received his designation. Andrew Boss receives an annual bonus of 3% of net income before tax. This year. Jack gave all of his staff a bonus, as they had received no wage increases in the last two years due to the sluggish economy. The total bonus amount paid was $25,000. Jack and Andrew Boss are not concerned about implementing additional controls. as they feel that BOSS LTD '8 processes are straightforward. and its employees are trushuorthy. Jack said a robotic welder for $3.000, as it was fully depreciated and was no longer required for building the tractors. The nancial processes are fairly manual; BOSS LTD uses an off-lhe-shelf accounting package for its GL. With the current potential growth, Jack and Andrew Boss feel that the current GL application may no longer meet their needs. Exhlblt III Boss Ltd. Observation of Inventory Count and Count Procedures Performed (Prepared by Mark. associate} Observation of Boss's Inventory Count on September so. 2019 Inventory ranges from Inexpensive parts. such as nuts and bolts. to valuable items, such as motors. In addition to raw materials. inventory also includes completed tractors. There is no work in process. A manager. who deals with Boss's inventory daily. supervised the count; most of the counters were those office staff available at the time. There weren't any written count procedures. but the manager said he told each count team which area to count. and asked that one member of the team perform the count and that the other member re-count it before writing it down. Rather than marking which areas are counted. Boss uses the ore-numbered count sheets to ensure all inventory is counted. Each count team took a pro-numbered count sheet from the manager. recorded their counts on the count sheet. and then handed it back to the manager. When a difference was found between the count sheet and Inventory records. a recount was performed. In the cases where there was still a difference. the manager considered this an error. and investigated the difference prior to changing the inventory records. The counters counted all Inventory on the shelves. no matter what condition it was in. I asked Andrew about this and found that the only time Boss writes off inventory is when it is taken off the shelves to be used but Is found to be damaged or obsolete. According to Andrew. this does not happen very often. Shipments were received during the count. and one staff person was dedicated to receiving the shipments Into the inventory system and placing those items on the shelves. Count Procedures Performed 1. 2. 3. I inspected the Inventory for items that looked old or damaged. and found the following: a. Two engines that looked old. as they were dusty b. Three boxes of nuts that were rusty c. 10 sets of tires that were deated I performed test counts of the inventory. I selected a sample of 15 from the count sheets and traced them to the physical Inventories on the shelf and selected a sample of 15 from the physical inventories on the shelf and traced them to the count sheets. I found one error. in which the count sheet Indicated that there were 290 gearboxes: when I counted. I found 250 gearboxes. When I Informed the inventory manager of this difference. there was a re- count. and 250 was found to be the correct number. The inventory manager adjusted the amount in the system. I obtained a copy of the final inventory listing and the count sheets. Exhibit IV Boss Ltd. Accounts Receivable and Legal Continuation Results Legal Continuation Results: Desorl- on of Claim Wrongful dismissal of Leon.an employee of BOSS LTD. Leon was tired for not following manufacturing safety protocol. He is suing for $120,000. Injury lawsuit of Mary for 3100.000. Mary was an employee of BOSS LTD, Who was injured on the Job In the re- Ir shou. Lawsuit from CEI'BTDI'B Ltd. BOSS LTD '3 Evaluation This lawsuit arose in 201?. We believe we will settle lor $67,000 belore it reaches court. and we have accrued this amount. The lawsuit arose in 2018. We believe we will settle for $48.000 belore it reaches court. and we have accrued this amount. Not identled by BOSS LTD Conrmation Results Legal counsel agreed wtth BOSS LTD '3 evaluation. The evaluation provided by the lawyers is a settlement of $78,000. Carefore Ltd., a emplierol BOSS @, is suing for 330.000 for breach of contract in 2018. The lawsuit will be settled for 815.000 before it reaches court. Accounts Receivable Confirmation Results: Note - We sent five confirmations to high value accounts, which make up a significant portion of total AR population. Amount BOSS LTD AR Sub- ledger Confirmed by Customer Amount (E) Customer Customer Response NX's Club Inc. E67,800 $59,325 Invoice said we received eight tractors, but we received seven. Jill-Mart Inc $20,756 20,756 Nil Emb's Grocery Ltd. E40,124 We sent the cheque for E40, 124 on September 29, 2019 Used a EUROS Haka Haka Inc. E30,578 23,094.65 exchange rate of 0.75527 Pata Shoes Ltd. $50,651 We received the goods on October 2, 2019