Cherry's Cupcakes (CC) is a

rapidly expanding,

popular chain of cupcake restaurants that has

been operating throughout Eastern Canada for over 25 years. CC is a family owned business

that employs over

215

staff in its

1

9 locations.

CC is owned by Cherry Charles whose passion for baking is evident in t

he high

-

quality cupcake

recipes that she has designed. Cherry has an intimate understanding of nut allergies and takes

pride in ensuring that CC locations only bake and sell cupcakes that are nut free.

CC locations

also provide baking lessons to local pare

nts of children who suffer from severe allergies.

For the past four years, CC has been the recipient of a

n annual

government grant that is given

to resta

urants in Canada who provide community education on food allergy and anaphylaxis

awareness. In additio

n to annual inspections of the programming materials, the government

requires CC to produ

ce audited financial statements on an annual basis.

Cherry would like to open four more cupcake restaurants

in Labrador City, Gander, St. John's

and

Corner Brook

in t

he next two years and in order to finance this expansion, CC

has recently

assumed a long

-

term loan with National Ban

k.

Extracts from CC

's financial statements are as follows (in '000s):

Revenue

$ 7,890

Net income before tax

$ 4,600

Total assets

$11,700

Accounts receivable

$ 885

Inventory

$ 3,875

Accounts payable

$1,025

Additional information:

A $150,000 bonus was paid to CC

's management team in

2017

due to its extraordinary

contribution of

opening up three new locations

during the year.

During

2017

, in an effort to generate cash

for the expansion

, CC

sold a tract of land

located

in Regina, Saskatchewan.

The gain on the sale of the

land

$480,000.

CC

has been

audited for many years by Lemon

and Reed

, CPAs.

As part of the planning for the

2017 financial statement audit, you have been asked to calculate overall, performance and

specific materiality thresholds for CC