Elizabeth (Liz) Lake lives in a million-dollar mansion in Don Mills. She spends time with her three children at a 1,134-square-metre waterfront cottage in central Ontario. She also gets about $22,600 a monthor $270,000 a yearto maintain those properties and cover living expenses.

Prominent realtor Joe Barnicke says its all possible with money her late husband stole from him, his firm J. J. Barnicke Ltd., and a family trust fund. Liz Lake has kept that lifestyle for almost two years since her husband jumped in front of a train at York Mills subway station. Jim Lake committed suicide on the morning of March 18, 1996, less than an hour after Barnicke confronted him at the firms downtown office about a lot of missing money. Lake, the firms star chief financial officer, excused himself and never returned.

Barnicke and his company immediately filed a lawsuit in court against Liz Lake and her husbands estate to recover what was left of $19.8 million Lake allegedly swiped over a decade. But Barnicke, the firms 74-year-old chairman, has found it isnt easy trying to get any of the alleged stolen money back. The courts are slow and Liz Lake is fighting him all the way for the mansion, country estate, cars, boats, snowmobiles, and life insurance proceeds. Barnicke wont talk publicly about the case but acquaintances say hes bitter and disillusioned over Liz Lakes continuing monthly allowances and the lengthy court proceedings. In the battle over the estate, Barnicke figures theres now only about $4 million to $5 million leftincluding life insurance proceedsafter all the spending.

No wonder. One of Lakes own accounting reports filed with the court reveals the couple spent almost $7 million after tax in the three years before his death. Lake fuelled that spending by jacking up his pay through misappropriation of Barnicke funds, according to documents filed in court. After a brief probe, Barnicke and top-flight forensic accountants Lindquist Avey MacDonald Baskerville Inc. said a paper trail revealed that the likeable Lake moved money from the companys operating funds and the chairmans personal accounts to a payroll system. He then transferred the money into personal bank accounts at the Bank of Nova Scotia.

Lake ran the payroll system, from which he was paid. Investigators found a copy of Lakes T4 form to Revenue Canada in his briefcase showing a gross income of $2,468,938.63 for 1995. But Lakes annual salary never exceeded $110,000, Barnicke said in the claim. Barnickes lawsuit also alleges Lake, who was 36 when he died, had improperly moved $1.5 million from a trust fund for Barnickes three children to his own account. Barnicke said his signatures on the transfer requests were forgeries.

Liz Lake denies her husband stole the money. If her husband did, its Barnickes own fault and he should suffer the losses, her statement of defence said. If the company had shown a minimal amount of diligence, it could have stopped any alleged losses and Lake might still be alive, she added. The plaintiffs (Barnicke) by their gross negligence caused or contributed to the death of her husband and the father of her three children, the statement of defence said. She insists that all money received from the company was earned, and was accurately recorded in J. J. Barnicke Ltd.s books and records. Those books and records were kept at the company offices and in fact Lake paid taxes on the full amount. As well, Elizabeth Lake points out, the Barnicke books were made available to accountants Ernst & Young at least annually and all her husbands earnings were deposited in their joint account at the Bank of Nova Scotia. (The bank is also named in the companys civil suit.)

Joe Barnicke, the blustery patriarch of the company, scoffs at the suggestion they are responsible for any financial loss. He stole the money, he told The Toronto Sun this week. He stole the money. Thats all we can say. Meanwhile, Barnickes lawyer, Chris Osborne, said the cost of paying for Liz Lakes lifestyle is bleeding the estate of hundreds of thousands of dollars. Reports placed on the public record suggest Liz and Jim Lake didnt hold back in the last years of his life. Lake collected annual paycheques ranging from $2.2 million to $4.3 million in gross income from 1990 to 1995. Lakes own printout of inflows and outflows covering July 1993 to February 1996 disclosed that income from work, interest, and revenue on property sales totalled about $7 million. But the outflows for expenses left them with only $35,000. Furthermore, (the receiver) said at one point the couple regularly rang up credit card charges of more than $43,000 a month. The Lakes had very lavish spending habits, the receiver noted. You are now tasked with performing the audit for J.J. Barnicke Ltd.

a) List the preliminary audit procedures that your firm should perform to decide whether to accept the J.J. Barnicke Ltd audit engagement for the current year, and explain how each factor affects the acceptance decision. (8 marks)

b) Identify and explain three business risk factors in J.J. Barnicke Ltd that you would need to understand in order to assess the risk of material misstatement in its financial statements. (6 marks)

c) Discuss two analytical procedures (e.g., ratios) to the J.J. Barnicke Ltd financial information that may be relevant for understanding J.J. Barnicke Ltds business performance. Explain how your findings can be informative for assessing the risk of material misstatement at the financial statement level for J.J. Barnicke Ltd. (3 marks)

d) Based on the business risk analysis for J.J. Barnicke Ltd, your audit manager believes the J.J. Barnicke Ltd Salaries and Wages expense balance has a high risk of material misstatement. Your manager has asked you to assess the risk of material misstatement at the assertion level for this account. Use the level high or not high to describe your assessments for each assertion, and explain the factors that support them. (5 marks)

e) Discuss 2 audit procedures that you would do on the Salaries and Wages expense account. Discuss which assertion the audit procedure relates to. (3 marks)