During 2017, the CEO who had led the Company for 7 years resigned. According to news reports, the resignation was a submitted in order to spend more time with his family. Shortly thereafter, the Chief Financial Officer and the Controller also left the Company. A new CEO and CFO were hired before midyear (after an acting CEO and CFO had been appointed and served for a couple months) but the Controller position had not been filled as of November 2017. In their first conference call with analysts who follow the company and issue earnings estimates, both the CEO and the CFO guaranteed the Company absolutely would meet its earnings targets. Coincidently, the new CEO is the owner of the building that the Company rents as its corporate headquarters.

The previous senior auditor on the engagement noted during interim testing that the roll-out of the new product line has not been going smoothly. In the early months of 2017, the Company was engaged in research relating to a new procedure to make their pottery products in the new home dcor line unbreakable, making the products desirable to families with small children. The Company indicated that the result of that research was successful, and the new technology was scheduled to be incorporated into the manufacturing process. However, implementing the new process took longer than expected. Shipments of product to retailers relating to products in the new home dcor line did not commence before the holiday period of 2017, and the roll-out was deferred until 2018. Because of the success of the research and long-term benefits that the research was going to provide to the Company, management has capitalized $300,000 of research costs as a deferred asset on this years balance sheet, and intends to amortize those costs over 20 years.

Sales of product from the old, traditional product lines continued to be flat or negative during 2017. Management was hopeful that the last weeks of the holiday ordering period in 2017 would bring increases in sales sufficient to equal the previous year.

During 2017, management of the Company installed a new software package to improve accounting and processing surrounding the purchases and payables process at the company. When the audit team was developing an understanding of internal control in this area, significant problems were noted, including the presence of two material control weaknesses in the system. Based on this finding, the previous senior auditor decided to test controls over payables and purchases at interim to be sure they were working.

In October 2017, GGI entered into an arrangement with a retail chain to provide gift products for the following Valentines Day. Manufacturing of these products began in late 2017, manufacturing was scheduled to end in early January, and shipment of the product was scheduled for mid-January. Management believes that shipment and delivery is assured and recognized $400,000 of revenue in October 2017.

Under terms of their employment contracts, the new CEO and CFO will receive a bonus of 30% of their base salary if net income for 2017 exceeds $12,000,000. Unaudited interim financial statements for the ten months ended 31 October 2017 indicated net income of $10,100,000, with a forecasted amount of $12,200,000 for the end of December.

Although sales in the traditional product lines have been slow to grow or in slight decline, the Company believes that due to the robust economy, the Company can reduce the amount reported in the Allowance for Doubtful Accounts on the balance sheet. The Company uses the allowance method (income statement approach) and reduced the estimated percentage of sales deemed uncollectible from 3.0% to 0.5%.

In 2016, management adjusted the inventory balance for an impairment due to holding approximately $200,000 of what appeared to be obsolete inventory. The Company continues to hold the inventory, but believes, due to the strength of the economy in 2017, that the product will be sold by the end of the year, and the write-off was unnecessary. Therefore, management has reversed the impairment write-off from last year into income this year. The previous senior auditor noted that controls over this area were particularly strong, as the CEO herself initiated and recorded this entry.

After the Company Board Meeting in September 2017, the Audit Committee met with the auditor for 30 minutes before the members had to leave to catch their planes. The next meeting of the Audit Committee is scheduled for mid-March 2018. A Board member who is a brother-in-law of the new CFO sits on the Audit Committee. The Internal Audit Department manager was laid off in 2016 in a cost-cutting measure. The Company is seeking to hire another manager, at a lower salary, to report to the Controller regarding internal audit matters. However, no one has been hired as yet, and the Department is led by one of the staff auditors.

Over recent years, labor relations at the Company have deteriorated. Employees consider themselves underpaid, as flat profitability in recent years has prevented the granting of raises. Although negotiations are continuing, warehouse and transportation workers have threatened to walk out prior to the end of the year if wages are not increased. Administrative and financial office workers, who are not unionized, are also upset about the lack of raises.

*Please evaluate each bullet point and state the issue with audit from an external auditor's perspective. Need it ASAP.

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