case analysis:

NORTHERN FRONTIER PARK

Assume you are an audit senior employed by an international public accounting firm. On

May 1, 2016, Ms. Benice, a partner in the firm, invites you to her office to discuss a special

engagement that you will be supervising. To ensure the engagement runs smoothly, she has

asked you to summarizein a written planning memorandumall important risks and factors to be

considered when conducting the engagement.

The client for the special engagement is Northern Frontier Park (NFP), a privately-held

company that operates a safari-style wildlife park in the northern Ontario. Until late last year,

NFP had been owned and managed by Mr. Kramer, founder and Chief Executive Officer (CEO).

Upon Mr. Kramers death in 2015, all shares in the company were distributed to his family.

Because no one in Mr. Kramers family wants to take over the business, the family will sell

100% of the NFP shares at the end of the current fiscal year to Newman, the current controller

and Chief Financial Officer (CFO) of NFP. Because NFP is a private company, a market price

for the shares is not readily available. Instead, the purchase/sale price will be based on a multiple

of five times the income earned from continuing operations in the year ended May 31, 2016,

calculated using ASPE. To ensure NFPs reported net income is appropriate, the Kramer family

has engaged your firm to provide assurance that the year-end financial statements are reliable

and are representative of on-going operations. In past years, NFPs financial statements always

have been prepared by the CFO without audit or review.

Similar to wildlife safari parks in Africa, visitors drive through NFPs 3200-acre park,

which is home to over 100 species of native animals, birds, and fish. Although hunting is not

allowed in the park, fishing is permitted from man-made lakes that NFP constructed and began

stocking with fish two years ago. The NFP park has become a popular year-round tourist

attraction, with the number of vehicle admissions increasing from 40,000 in 2008 when the park

opened to over 55,000 in the 2015 fiscal year. Most of NFPs revenues are earned through park

admission and hotel accommodation fees. Each vehicle admitted to the park is charged a $20

entrance fee, and approximately one-third of all park visitors stay in NFPs 85-room hotel. With

an average nightly rate of $110, hotel occupancy rates typically average 60% each year. Most

purchases and payments relate to animal and fish acquisition, feeding, and medical care, as well

as to hotel administration and operations.

To assist you in preparing the planning memorandum, Ms. Benice has provided you with

unaudited financial statements prepared by the CFO (Exhibit 1) and other relevant client

information (Exhibit 2). Upon reviewing this information, you recognize that because todays

date (May 1) precedes NFPs year-end (May 31), only 11 months of operations are included

presently in NFPs income statement. Ms. Benices discussions with the CFO indicate that

although the balances on the 12-month income statement will be larger, their relative percentage

of revenues (as shown) are unlikely to change.

Requirements

1. Identify two individuals or groups, other than the accounting firm, who benefit from this

special investigation. Explain how each beneficiary is likely to be affected by the

resulting financial statements.

2. Evaluate the following accounting decisions in 2015 using the Diamond Approach by

identifying the chosen accounting method, any shortcomings in this chosen method,

evaluate the issue through a balanced discussion by applying judgement

criteria/arguments and present any adjusting entries to correct any shortcoming. All

adjustments must comply with generally accepted accounting principles for private

enterprises. Ignore any tax effects

a. The write-off of fish stock

b. The change in accounting for animals from specific identification to average cost

c. The change in the useful life of hotel buildings

d. The liability accrued for damaging park ecology.

3. Discuss Newmans bias, the degree to which this bias may be influencing his accounting

choices and the resulting effects of this bias to Newman and the Kramer family.

This case is adapted from Northern Frontier Park by Fred Phillips and Roger D. Martin as

published in Issues in Accounting Education Vol. 13, No. 4 November 1998. Reprinted with

permission from Phillips, F., and R. D. Martin. 1998. Instructional case: Northern Frontier

Park. Issues in Accounting Education (November): 1005-1018. Copyright, American Accounting

Association.

EXHIBIT 1a

NORTHERN FRONTIER PARK

excerpts from the

UNAUDITED STATEMENTS OF INCOME AND RETAINED EARNINGS

(thousands of dollars)

April 30,

2016

%

2016

May 31,

2015

%

2015

Revenuespark admission

hotel rentals

animal sales

Hotel operating costs

Animal feed and care

Interest expense

Cost of animal sales

Depreciation & fish write-offs

Restoration and other costs

Income before income taxes

Income taxes

Net income

Dividends

Retained earnings, beginning

Retained earnings, end

$ 1,028

1,907

156

3,091

1,328

992

198

72

71

162

2,823

268

(80)

188

(173)

257

$ 272

33.3

61.7

5.0

100.0

43.0

32.1

6.4

2.3

2.3

5.2

91.3

8.7

(2.6)

6.1

$ 1,120

2,080

102

3,302

1,451

1,129

96

31

29

10

2,746

556

(167)

389

(280)

148

$ 257

33.9

63.0

3.1

100.0

43.9

34.2

2.9

1.0

0.9

0.3

83.2

16.8

(5.0)

11.8

EXHIBIT 1b

NORTHERN FRONTIER PARK

excerpts from the

UNAUDITED BALANCE SHEET and NOTES TO THE FINANCIAL STATEMENTS

(thousands of dollars)

April 30,

2016

May 31,

2015

Assets

Cash

Hotel customer accounts receivable

Less: Allowance for doubtful accounts

Animal and fish stock

Capital assets

Less: Accumulated amortization

$ 244

403

(70)

659

1,956

(271)

$ 2,921

$ 113

460

(40)

714

1,942

(235)

$ 2,954

Liabilities

Accounts payable

Accrued liabilities

Long-term debt

$ 537

308

1,802

2,647

$ 629

155

1,911

2,695

Shareholders Equity

Share capital

Retained earnings

$ 2

272

274

$ 2,921

$ 2

257

259

$ 2,954

Significant Accounting Policies

Animal and fish stock In accordance with industry practice, the stock of fish and animals is

reported at the lower of cost or market value. Market values are estimated using current

replacement costs.

Capital assets Capital assets include land, man-made lakes, hotel buildings, and equipment.

Hotel buildings and equipment are amortized on a straight-line basis over their estimated useful

lives. In 2016, the remaining estimated useful life of hotel buildings was reduced from 25 to 18

years thus increasing depreciation expense by $15. Land and man-made lakes are not amortized.

Contingent Liabilities NFP does not routinely collect the scientific data needed to evaluate the

ecological health of its park, yet significant growth in visitors over the past 5 years is thought to

be damaging park ecology. In 2016, NFP accrued a liability in the amount of $150 (thousand) for

possible future environmental restoration costs that may be incurred as a result of deteriorating

park ecology.

EXHIBIT 2

OTHER CLIENT INFORMATION

Beginning the day NFP was founded, Mr. Kramer carefully controlled every aspect of NFPs

operations, using his extensive knowledge of veterinary care, marketing, and federal laws and

regulations. As CEO, Mr. Kramer was respected by everyonenot only NFPs employees and

customers, but also concerned environmental and animal-rights activists. On the financial side,

Mr. Kramer worked closely with Newman, Controller and CFO, to design and implement a

strong accounting system. All purchases of fish and animals for the park were approved by Mr.

Kramer; hotel profitability was reviewed by Mr. Kramer and Newman on a monthly basis; and

park admission revenues and cash receipts were compared daily to vehicle counts obtained from

monitors installed at the admission gates. A perpetual inventory system was introduced to

monitor quantities of fish and animals.

The perpetual inventory system was implemented in the 2015 fiscal year to track quantities of

fish and animal stock present on the NFP park grounds. NFP personnel easily can track the

number of fish released into the man-made lakes, as well as the number of fish caught and

removed. Unfortunately, the number of fish births and mortalities are more difficult to track.

NFP estimates these numbers based on its prior experience, allowing for possible changes in

environmental conditions. Newman has described December 2015 as an unusually harsh winter

month and, accordingly, has had to override the perpetual system by writing-off significant

quantities of fish stock. The write-off resulted in 20% of the December 2015 fish stock balance

($40) being charged as an expense on the income statement.

In contrast to fish stock, animal stock apparently survived the harsh weather with much greater

success. In fact, Newman mentioned that 30 newborn animals survived in 2016, as compared to

only 20 in each of the prior three years. Many of these newborn animals were sold to private

zoos and other animal parks in 2016; consequently, animal sales revenues have increased in the

current year.

The growth in successful animal births also has led Newman to reconsider the accounting policy

used to record and update animal stock costs. The animal stock account primarily includes costs

for adult animal purchases, although some birth-related medical care costs also are included. In

the past, these animal costs were assigned to each individual animal using the specific

identification inventory method. Newman apparently found that method overly cumbersome, and

decided to change to an average cost method for all animals in January 2016. Consequently,

when newborn animals now are sold, the average cost of animal stock at the time of sale is used

to determine the cost of animal sales to be expensed on the income statement. The animal ending

inventory was $30 lower as a result of this change.

NORTHERN FRONTIER PARK Assume you are an audit senior employed by an international public accounting firm. On May 1, 2016, Ms. Benice, a partner in the firm, invites you to her office to discuss a special engagement that you will be supervising. To ensure the engagement runs smoothly, she has asked you to summarize-in a written planning memorandum-all important risks and factors to be considered when conducting the engagement. The client for the special engagement is Northern Frontier Park (NFP), a privately-held company that operates a safari-style wildlife park in the northern Ontario. Until late last year, NFP had been owned and managed by Mr. Kramer, founder and Chief Executive Officer (CEO). Upon Mr. Kramer's death in 2015, all shares in the company were distributed to his family. Because no one in Mr. Kramer's family wants to take over the business, the family will sell 100% of the NFP shares at the end of the current fiscal year to Newman, the current controller and Chief Financial Officer (CFO) of NFP. Because NFP is a private company, a market price for the shares is not readily available. Instead, the purchase/sale price will be based on a multiple of five times the income earned from \"continuing operations\" in the year ended May 31, 2016, calculated using ASPE. To ensure NFP's reported net income is appropriate, the Kramer family has engaged your firm to provide assurance that the year-end financial statements are reliable and are representative of on-going operations. In past years, NFP's financial statements always have been prepared by the CFO without audit or review. Similar to wildlife safari parks in Africa, visitors drive through NFP's 3200-acre park, which is home to over 100 species of native animals, birds, and fish. Although hunting is not allowed in the park, fishing is permitted from man-made lakes that NFP constructed and began stocking with fish two years ago. The NFP park has become a popular year-round tourist attraction, with the number of vehicle admissions increasing from 40,000 in 2008 when the park opened to over 55,000 in the 2015 fiscal year. Most of NFP's revenues are earned through park admission and hotel accommodation fees. Each vehicle admitted to the park is charged a $20 entrance fee, and approximately one-third of all park visitors stay in NFP's 85-room hotel. With an average nightly rate of $110, hotel occupancy rates typically average 60% each year. Most purchases and payments relate to animal and fish acquisition, feeding, and medical care, as well as to hotel administration and operations. To assist you in preparing the planning memorandum, Ms. Benice has provided you with unaudited financial statements prepared by the CFO (Exhibit 1) and other relevant client information (Exhibit 2). Upon reviewing this information, you recognize that because today's date (May 1) precedes NFP's year-end (May 31), only 11 months of operations are included presently in NFP's income statement. Ms. Benice's discussions with the CFO indicate that although the balances on the 12-month income statement will be larger, their relative percentage of revenues (as shown) are unlikely to change. Requirements 1. Identify two individuals or groups, other than the accounting firm, who benefit from this special investigation. Explain how each beneficiary is likely to be affected by the resulting financial statements. 2. Evaluate the following accounting decisions in 2015 using the \"Diamond Approach\" by identifying the chosen accounting method, any shortcomings in this chosen method, evaluate the issue through a balanced discussion by applying judgement criteria/arguments and present any adjusting entries to correct any shortcoming. All adjustments must comply with generally accepted accounting principles for private enterprises. Ignore any tax effects a. The write-off of fish stock b. The change in accounting for animals from specific identification to average cost c. The change in the useful life of hotel buildings d. The liability accrued for damaging park ecology. 3. Discuss Newman's bias, the degree to which this bias may be influencing his accounting choices and the resulting effects of this bias to Newman and the Kramer family. This case is adapted from Northern Frontier Park by Fred Phillips and Roger D. Martin as published in Issues in Accounting Education Vol. 13, No. 4 November 1998. Reprinted with permission from Phillips, F., and R. D. Martin. 1998. Instructional case: Northern Frontier Park. Issues in Accounting Education (November): 1005-1018. Copyright, American Accounting Association. EXHIBIT 1a NORTHERN FRONTIER PARK excerpts from the UNAUDITED STATEMENTS OF INCOME AND RETAINED EARNINGS (thousands of dollars) April 30, 2016 % 2016 May 31, 2015 % 2015 $ 1,028 1,907 156 3,091 33.3 61.7 5.0 100.0 $ 1,120 2,080 102 3,302 33.9 63.0 3.1 100.0 1,328 992 198 72 71 162 2,823 43.0 32.1 6.4 2.3 2.3 5.2 91.3 1,451 1,129 96 31 29 10 2,746 43.9 34.2 2.9 1.0 0.9 0.3 83.2 Income before income taxes 268 8.7 556 16.8 Income taxes (80) (2.6) (167) (5.0) Net income 188 6.1 389 11.8 Dividends (173) (280) 257 148 $ 272 $ 257 Revenues-park admission -hotel rentals -animal sales Hotel operating costs Animal feed and care Interest expense Cost of animal sales Depreciation & fish write-offs Restoration and other costs Retained earnings, beginning Retained earnings, end EXHIBIT 1b NORTHERN FRONTIER PARK excerpts from the UNAUDITED BALANCE SHEET and NOTES TO THE FINANCIAL STATEMENTS (thousands of dollars) April 30, 2016 May 31, 2015 Assets Cash Hotel customer accounts receivable Less: Allowance for doubtful accounts Animal and fish stock Capital assets Less: Accumulated amortization $ 244 403 (70) 659 1,956 (271) $ 2,921 $ 113 460 (40) 714 1,942 (235) $ 2,954 $ 537 308 1,802 2,647 $ 2 272 274 $ 2,921 $ Liabilities Accounts payable Accrued liabilities Long-term debt Shareholders' Equity Share capital Retained earnings $ 629 155 1,911 2,695 2 257 259 $ 2,954 Significant Accounting Policies Animal and fish stock In accordance with industry practice, the stock of fish and animals is reported at the lower of cost or market value. Market values are estimated using current replacement costs. Capital assets Capital assets include land, man-made lakes, hotel buildings, and equipment. Hotel buildings and equipment are amortized on a straight-line basis over their estimated useful lives. In 2016, the remaining estimated useful life of hotel buildings was reduced from 25 to 18 years thus increasing depreciation expense by $15. Land and man-made lakes are not amortized. Contingent Liabilities NFP does not routinely collect the scientific data needed to evaluate the ecological health of its park, yet significant growth in visitors over the past 5 years is thought to be damaging park ecology. In 2016, NFP accrued a liability in the amount of $150 (thousand) for possible future environmental restoration costs that may be incurred as a result of deteriorating park ecology. EXHIBIT 2 OTHER CLIENT INFORMATION Beginning the day NFP was founded, Mr. Kramer carefully controlled every aspect of NFP's operations, using his extensive knowledge of veterinary care, marketing, and federal laws and regulations. As CEO, Mr. Kramer was respected by everyonenot only NFP's employees and customers, but also concerned environmental and animal-rights activists. On the financial side, Mr. Kramer worked closely with Newman, Controller and CFO, to design and implement a strong accounting system. All purchases of fish and animals for the park were approved by Mr. Kramer; hotel profitability was reviewed by Mr. Kramer and Newman on a monthly basis; and park admission revenues and cash receipts were compared daily to vehicle counts obtained from monitors installed at the admission gates. A perpetual inventory system was introduced to monitor quantities of fish and animals. The perpetual inventory system was implemented in the 2015 fiscal year to track quantities of fish and animal stock present on the NFP park grounds. NFP personnel easily can track the number of fish released into the man-made lakes, as well as the number of fish caught and removed. Unfortunately, the number of fish births and mortalities are more difficult to track. NFP estimates these numbers based on its prior experience, allowing for possible changes in environmental conditions. Newman has described December 2015 as an unusually harsh winter month and, accordingly, has had to \"override\" the perpetual system by writing-off significant quantities of fish stock. The write-off resulted in 20% of the December 2015 fish stock balance ($40) being charged as an expense on the income statement. In contrast to fish stock, animal stock apparently survived the harsh weather with much greater success. In fact, Newman mentioned that 30 newborn animals survived in 2016, as compared to only 20 in each of the prior three years. Many of these newborn animals were sold to private zoos and other animal parks in 2016; consequently, animal sales revenues have increased in the current year. The growth in successful animal births also has led Newman to reconsider the accounting policy used to record and update animal stock costs. The animal stock account primarily includes costs for adult animal purchases, although some birth-related medical care costs also are included. In the past, these animal costs were assigned to each individual animal using the specific identification inventory method. Newman apparently found that method overly cumbersome, and decided to change to an average cost method for all animals in January 2016. Consequently, when newborn animals now are sold, the average cost of animal stock at the time of sale is used to determine the cost of animal sales to be expensed on the income statement. The animal ending inventory was $30 lower as a result of this change