Case: Feel Good Uniform Limited

Feel Good Uniform Limited (FGUL), began operations in 2010 under the ownership of 2 entrepreneurs: Jon Staples and Francis Kneedles. The operation was set up to manufacture uniforms for people working in health care, i.e., nurses, physiotherapists, dental hygienists, etc. The company is funded by the two owners, Jons wealthy uncle and the local bank. The bank agreement requires that the company maintain a CA:CL ratio of 2:1 or the bank loan will be payable within 30 days of breaching (breaking) the covenant agreement. The current assets included in the CA:CL calculation are cash and cash equivalents, net accounts receivables and finished good inventory.

The company has experienced market share growth and increasing profitability since 2012 (years 2010 and 2011 were the only years where FGUL incurred operating losses). The company employs 76 people: 8 work in the office (5 work performing accounting functions) and 60 people work in the manufacturing process, 8 people work delivering finished products to customers. Most employees have been with the company since its inception (beginning). The current pandemic has resulted in a shortage of staff in the accounting office so the owners have been using a temporary employment agency to perform duties such as preparing the bi-weekly payroll and following up on outstanding and old Accounts Receivable balances from customers.

With this ongoing pandemic and recommendations from the CDC, the company added a new production line: 3-layer cloth medical masks. FGUL began the manufacturing of the 3-layer cloth medical masks in September 2021. The company obtained additional funding from the bank and the provincial and federal governments to purchase new equipment and hire and train 10 more employees to facilitate the new line of 3-layer cloth medical masks. The cost of the new equipment was $1,257,000. The company has not made cloth masks in the past as their focus was on uniforms, i.e., tops and pants. The raw materials, i.e., fabric, thread, elastic, for making masks will be sourced from one of their current suppliers who operates in China. To secure the supplies of raw materials, on December 15, 2021, Jon and Francis signed a purchase commitment for $300,000.

The companys yearend is December 31. FGUL uses the ASPE framework for the preparation of its financial statements. The companys current CFO, a CPA, joined the company 5 years ago after working for one of the Big Four firms.

You work for Keith and Urban, LLP, the firm that has audited the company since its inception and you have been assigned to the audit of FGUL. You will be auditing cash, accounts receivable, prepaid assets, and capital assets and reviewing the note disclosures.

On January 10, 2022, the audit team arrives at the clients premises to begin the field work. On January 11, you meet with Jon, one of the owners, to discuss the new capital asset addition.

The draft financial statements show the following information:

Total Sales: $9,588,950.00

Net Income before taxes: $1,632,600.00

Net Income after taxes: $ 1,224,450.00

Current Assets $ 618,673.00

Current Liabilities $ 312,337.00

Required:

Based on the specific information provided in the scenario above, identify 2 inherent risk factors based on the information provided. One inherent risk factor identified must increase inherent risk and one must decrease inherent risk. Ensure you clearly identify this in your answer. Then link the inherent risk factor to the potential impact on the financial statements.