Evidences and Questions for risk Assesment Please

Deannas Delights: An Interview Exercise in Risk Assessment Introduction In the spring of 2010, Deanna Long graduated from culinary school and considered her future. She had anoffertobeajuniorpastrychefatalargehotelbutitjustsoundedsodull. Aftertalkingwithfriends and family, Deanna decided to start her own business, called Deannas Delights (DDI), teaching baking classes to small groups, grade schools, and private customers at their own locations. Her business was a success right away and within six months, Deanna had expanded to her own bakery with fresh-baked goods for sale, a regular schedule of baking classes, and baking equipment sales. Now, DDI has grown even larger. It has four full-service locations, online sales and class schedules, and baking class contracts with several retirement communities and other organizations. Itownsthe building next to the original store which serves as both the headquarters of DDI and the main warehouse. To achieve this growth, Deanna brought in three additional investors and borrowed from her local bank. Even though DDI is privately held, the bank and investors would like an audit to ensure the financial reporting is reliable. Braun, Ellis, Garibaldi (BEG) is a regional accounting firm with eight offices in the tri-state area. It performs audit and tax services for local businesses and consulting on a variety of business solutions. Most of BEGs clients are privately held. Many have multiple locations throughout the area. The industries served by BEG range from service and technology to light manufacturing to hospitality and entertainment. As a result of BEGs commitment to providing high-quality service, all BEG staff are well trained and focus on one industry or service after their second year at the firm. This is BEGs first year auditing DDI and the partner in charge is Nate Braun. The audit manager is Carolyn Montgomery. She has assigned you to work on this with Casey Peters, the audit senior. Casey has just begun to specialize in the restaurant and hospitality area and is eager to work with DDI. To help begin the process, Casey has summarized information about DDI in the memos below. Note that since this is a new client for BEG, there is still a great deal of information to gather. Assignment You have been assigned to an audit team. With your team, you need to review the memos Casey has prepared to identify potential areas of risk (either risk of material misstatement or fraud risk). You will then develop a strategy to interview the seven DDI headquarters staff during the next class period. Each member of your team will be allowed to ask questions to one DDI employee for 2 minutes. Plan some questions in advance that you will ask the various personnel. The interview schedule will be provided in class. Whenfinishedwiththeinterviews, answer

each of the following questions to the best of your ability.

1. For each functional area, what are the key risk factors of a material misstatement? Do you think a material misstatement is likely to occur?

2. In one functional area, there is evidence of potential fraud. Which area and what is the evidence? How would you adapt the audit to determine if fraud did take place?

3. For each of the remaining functional area, how would you rate the risk of fraud? What support do you have for this conclusion?

1 Deannas Delights, Inc. Initial Company Information Ownership DDI is a privately held Pennsylvania corporation. Ron Hartman, (23%), Kim Lee (17%) and Pat Allen (9%). Long is the only one of the owners involved with day-to-day activities. The Board of Directors consists of Long, Hartman, Lee, and a local lawyer. An annual audit is required by the terms of DDIs new financing. Organization DDI has centralized accounting and warehouse processes located at the corporate headquarters. Additionally, there are five revenue centers: four full-service stores and one online store. Annual sales have recently exceeded $1,000,000 for the first time. There are a total of 62 employees including full- and part-time staff. While there has always been a degree of turnover in the part-time staff, the full-time staff has been fairly stable. Theorganizationchartforheadquartersisshownbelow: FIGURE 1: DEANNA'S DELIGHTS, INC. CORPORA TE HEADQUARTERS ORGANIZATION CHART There are four shareholders: Deanna Long (51%), P-1 Prep: CP 10/12/20 Rev: CM 10/17/20 Steve Weimer Controller Deb Lasher SR Accountant Marcus Scott PR Accountant Ben Farmer AP Accountant Jo Morgan Treasurer Deanna Long CEO Andy Madison VP Inventory Bakery Inventory Manager Equipment Inventory Manager Ellie Warren VP Sales Store 1 Manager Store 3 Manager Website Manager Store 2 Manager Store 4 Manager Headquarters Employees Most of the staff located in the headquarters building have been with DDI for at least two years. In fact, all the executives and accounting staff have been with the firm at least three years. These include Steve Weimer, CPA, Controller. He manages the general ledger, reconciles the bank accounts, and supervises the accountants. Mr. Weimer earned his Bachelors Degree in accounting and information systems from a local university. HehasbeenwithDDIforsevenyears. Deb Lasher, Senior Accountant. Ms. Lasher is responsible for all Accounts Receivable processing. She maintains the records of baking class contracts, which are due to be paid 2 Deannas Delights, Inc. Initial Company Information FYE 12/31/20 P-1 Prep: CP 10/12/20 Rev: CM 10/17/20 monthly, accounts for large equipment customers, and records the store revenues. She has been with DDI for four years and has an Associates Degree in accounting. Marcus Scott, Payroll Accountant. Mr. Scott has been with DDI for three years. He is responsible for all the payroll accounting for all the stores and headquarters. He does not have a degree but has spent 15 years in accounting and administrative positions. Ben Farmer, Accounts Payable Accountant. Mr. Farmer has been with DDI for five years, starting in one of the stores and moving up to headquarters two years ago. He is responsible for processing all Accounts Payable transactions. He maintains the vendor accounts and pays all bills by the discount date if possible. HehasjustcompletedhisBachelorsDegreeinaccounting from a nearby college. Jo Morgan, Treasurer. Ms. Morgan is another long-term employee. She joined DDI over seven years ago. At that time, she and Mr. Weimer handled all the accounting and cash management themselves. Two years ago, she was promoted to her current position where she manages all the cash and investment accounts as well as managing the debt payments. Ms. Morgan has a Bachelors Degree in Finance and minored in accounting. Andy Madison, Vice President of Inventory. Mr. Madison supervises all inventory for the stores and the website sales. This includes the baking inventory, which must be carefully managed for spoilage at each store, and the equipment inventory, which is sold in the stores and online. Mr. Madison has been involved with managing supplies for restaurants and hotels for over20years. HehasbeenwithDDIforfouryears. Ellie Warren, Vice President of Sales. Ms. Warren joined the company four years ago as DDI began to expand locations and its web presence. Previously, she spent many years managing a chain of coffee shops. Sheisresponsibleforhiringandmanagingthestoremanagersand website managers. She sets the store revenue and profit targets, created a store bonus program for the managers, and is responsible for the baking contracts. 3 Deannas Delights, Inc. ControlDocumentationSummary FYE 12/31/20 Policy and Procedure Documentation Review P-2 Prep: CP10/12/20 Rev: CM 10/17/20 Ms. Long insisted on producing written job descriptions and responsibilities for all employees on the organization chart (Figure 1), regardless of the location of their work. She provided a copy of these to BEG staff. Relevant information gleaned from this documentation is summarized below. Accounts Receivable (AR) Ms. Lasher manages all of the AR accounting. She receives new baking class contracts from Ms. Warren, prepares a schedule of earned revenue based upon the contracts, and sends out monthly invoices for the contracted amounts. Shealsoreceivespaymentsfromthecontracts(including deposits paid in advance) and prepares deposit slips once per week, usually on Thursday or Friday). Mr. Weimer receives her deposit documentation and makes the deposit at the local bank. In addition to the baking class contracts, DDI has a modest amount of AR from equipment purchases. Several repeat customers (often small restaurants, hotels, or civic groups) have been approved to purchase baking equipment on account with 30-day payment terms. These customers have been approved by Ms. Long, purchase the items at one of the stores or online, and have the documentation forwarded to Ms. Lasher for recording. Each Monday, she prepares invoices based on the information. As with the baking contracts, she records the AR, follows up for payment, receives payments from customers, and includes these with the weekly deposit. Finally, Ms. Lasher receives a summary report daily from each store and the website manager of all sales by type. She reconciles the totals with the store cash receipts and records the revenue in the accounting records. She then provides a summary for Mr. Weimer to match to the bank reconciliation. Each month, Ms. Lasher prepares a schedule of outstanding AR accounts and forwards it to Mr. Weimer for review. On the rare occasion when an outstanding account is deemed uncollectible, Mr. Weimer makes a note on the schedule and Ms. Lasher performs the actual write-off of the account. Payroll Mr. Scott is responsible for all payroll at DDI, including the stores, warehouse, website staff, and headquarters. Allheadquartersstaffareonsalary,as are the inventory and store managers. At each store, the staffing is similar: one store manager, one assistant manager, one head baker, two part-time assistant bakers, three part-time sales staff, and two part-time baking instructors that can help the sales staff when not teaching. There are two part-time floaters that are available to help in any store or in the warehouse if there is a large number of equipment sales needing shipment. The warehouse has two inventory managers, each responsible for three part-time inventory staff. Finally, the website staff includes the salaried website manager, one video content manager, and two part-time assistants. Mr. Scott processes three types of payroll transactions. For the salaried employees, he prepares payroll for the 1st and 15th of every month, in the same amount. These are prepared using a standard schedule two business days before and the employees direct deposits are available at midnight on payday. For the hourly employees, both full-time and part-time, he receives the hours from the appropriate manager each Monday. The two floaters are scheduled by Ms. Warren, but Mr. Scott tracks the hours for them, as they do not have just one manager during the week. Payroll is prepared on Wednesday and employees receive their pay each Friday. Finally, each quarter a bonus is paid to Ms. Warren, the website manager, and the store managers if sales have reached a pre-determined target. The bonuses amount to 1.25% of the employees annual salary. To prepare these, Mr. Weimer provides Mr. Scott 4 Deannas Delights, Inc. ControlDocumentationSummary FYE 12/31/20 P-2 Prep: CP10/12/20 Rev: CM 10/17/20 with a schedule of the target and actual sales. Mr. Scott then runs a special payroll for the bonuses, if any. Since all funds are paid via direct deposit, there are no checks to sign. Instead, Mr. Scott prepares a payroll summary register for Mr. Weimer of all employees and their pay. Mr. Weimer then uses this during his bank reconciliation process. Finally, all payroll taxes and others with holdings are summarized in a schedule and forwarded to Ben Farmer for payment. Accounts Payable (AP) Mr. Farmer is responsible for processing and recording all AP transactions. Invoices for all inventory items are submitted by Mr. Madison, along with receiving reports confirming the proper delivery. Invoices for other purchases, including office supplies, marketing materials, and vehicle expenses, are submitted by the store manager or headquarters staff. Allvendorshavebeenapprovedinadvanceby Ms. Long or Mr. Weimer. It is DDI policy to make every effort to pay invoices within any discount period offered. There are also a number of recurring payments that do not involve irregular invoices. Payments are due monthly for the rent on three of the stores, the mortgage on the remaining store and headquarters building, other loans outstanding, building and vehicle insurance, janitorial services for the stores and headquarters, long-term advertising services, taxes, and utilities. Mr. Farmer keeps a schedule of all payments due to ensure that none are paid late. Each week, Mr. Farmer reviews the list of payments due to all vendors for the next four weeks. He identifies those that need to be paid in the current week and forwards the list to Mr. Weimer for approval of payments. On Thursdays, Mr. Farmer prepares the payments to go out, primarily by electronic bill-pay, and the payments are made that afternoon. HeforwardsthepaymentregistertoMr. Weimer for use in the bank reconciliations. Cash Management Ms. Morgan manages all cash accounts, investment accounts, and loan contracts. She is responsible for ensuring that DDI can pay its bills on time and that excess cash is used to reduce outstanding debt or earn investment income. Each Monday, she meets with Mr. Weimer to determine the expected cash needs for the week. Each day, the stores deposit their cash receipts in a local branch of the companys bank. Allotherdepositsaremadetowardtheendoftheweekasdescribedabove. All payments from payroll and AP are toward at the end of the week as well. Mr. Weimer uses reports from Ms. Warren inSalestoanticipatethestorecashreceiptsandanyvariationsinpayroll. HeusesthereportsfromMr. Farmer to anticipate cash payments for the week. At this point, Ms. Morgan has an understanding of the cash needs for the week. If there is likely to be a shortfall for the week, she arranges the cash to come in from investments or a line of credit DDI has with its bank. If there is likely to be an excess of cash, she determines whether to pay down the line or invest the funds in DDIs stock and bond investment portfolio. At the end of the week, once all her cash management transactions have been completed, she provides Mr. Weimer with a report of the current outstanding balance on the line of credit and other loans, as well as the current balance of the investment portfolio.

--- your team will conduct preliminary interviews for a new client, Deanna's Delights, Inc. Read the material provided on the client. You should discuss the case with your team before the interviews and develop a strategy of whom to interview and in what order. The interview options are the seven people described in the case materials: Steve Weimer, Deb Lasher, Marcus Scott, Ben Farmer, Jo Morgan, Andy Madison, and Ellie Warren.