Fax It To Me ("FITM") Inc., is a software company that has developed technology that allows for faxing documents using your personal computer and has been audited by a local firm in Montreal, QC, Stanislov and Pang, LLP.The audit firm has just promoted Jan Majorowicz to the position of Audit Manager.The responsibilities of the Manager include planning the audit, reviewing the working papers of the staff and drafting the overall audit opinion.

Jan is working on the year end financials for FITM which has a June 30, 2016 year end.

Key financial information is in Appendix A.

Required:

Use the Case Facts above to outline the answers for the following. Any answer with no application to the case will be awarded zero marks

A) In reviewing the financial statements, perform five (5) analytical procedures and discuss the rationale for specific balances, disclosures or presentations that would warrant further follow-up based upon the results of your calculations.Show all calculations.Use the following table format:(15 marks)

Analytical procedure (1 mark)

Specific balance or disclosure requiring follow-up (1 mark)

Rationale for further follow-up (1 mark)

B) Discuss five procedures that could be performed to substantiate the Harmonized Sales Tax ("HST") liability.(5 marks)

C) Provide three (3) control weaknesses using the case facts.Use the format of Weakness, Impact and Recommendation.Provide different recommendations for each weakness.(9 marks)

Weakness (1 mark)

Impact (1 mark)

Recommendation (1 mark)

D) Identify three (3) audit tests of controls that you could perform and the related specific financial statement assertions to validate licensing revenue. Use the table format below:(6 marks)

Tests of control (1 mark)

Specific audit assertion (1 mark

APPENDIX A - KEY FINANCIAL INFORMATION FOR FITM

Statement of Earnings ('000's CAD)

Unaudited

Audited

June 30,2016

June 30, 2015

Revenue

Licensing revenue

105,682

203,006

Costs and expenses

Research & Development Costs

15,365

36,383

Salaries & Wages (Note 1)

62,780

97,690

Commissions (Note 2)

22,455

27,790

Bad Debts (Note 5)

1,650

328

Interest Expense (Note 3)

800

650

Administrative expense

15,731

38,810

Total costs and expenses

118,781

201,651

Income (Loss) before income taxes

(13,099)

(1,355)

Income taxes (recovery)

(5,405)

(215)

Net earnings (Loss)

(7,694)

(1,140)

Extracts from the Statement of Financial Position ('000's CAD)

Cash and Marketable Securities

110

891

Accounts receivable

39,256

14,117

Fixed Assets (Note 4)

48,785

40,772

Accrued Liabilities

49,573

38,524

Bank Indebtedness (Note 3)

15,259

5,902

Other Financial Information

1) Sales have dropped significantly as the market for fax software is shrinking rapidly due to the use of web-based document sharing.The company restructured in 2016 by significantly cutting costs and laying off 75% of its workforce.No other products are in development in the R&D pipeline.

2) FITM advances commissions to its salespeople each month based on 25% of their salary.When commissions are earned, advances are deducted from the earned salary.Salespeople are not required to repay advances when they leave FITM.

3) FITM is in the midst of re-negotiating its financing as it defaulted on its last monthly payment due August 2016.No further financing has been secured and Jan estimates that the company only has enough cash to sustain operations until March 2017.

4) With the decline in sales, FITM is canceling plans to build a research lab on a piece of land purchased in 2014.The land has appreciated in value from $10M in 2014 to $18M in 2016.

5) In 2016, FITM began a program for customers to pay in 6 monthly installments using their credit card.However, payment defaults increased as customers would cancel their credit cards or exceed their credit card limits during the 6 month period.With the reduced workforce, FITM has been unable to collect these default accounts.

6) Mohan, the Accounting Supervisor, has informed Jan that the Canada Revenue Agency has filed a claim against FITM for unreported and unpaid Harmonized Sales Taxes ("HST") since the company's inception.Mohan has not accrued anything as he is not trained in IFRS and is unsure what the proper accounting treatment is.