Founded in 1980 by Ron McLellan, the Toronto-based company was a manufacturer and retailer of customized basketball shoes. In 1993, Cloud 9 Inc. (a publicly listed Canadian company) purchased the original company from Ron McLellan and renamed it Cloud 9 Ltd. As part of the sale agreement, Ron McLellan was appointed to the Cloud 9 Ltd. board of directors.
Cloud 9 Ltd. has 52 full-time employees. In the retail store, the company employs part-time staff, with casual employees enhancing staffing levels in the busier retail period.
To administer the company’s finances, Cloud 9 Ltd. employs Finance Director, David Collier; Financial Controller, Carla Johnson; and Business Systems Manager, Justin Reeves.
These three employees are entitled to participate in the employee stock option plan and receive stock options in Cloud 9 Inc. if revenue targets are met.
Financial information Responding to pressure from its parent company, Cloud 9 Ltd. set a goal to increase its revenue by 4 percent for the 2020 fiscal year. One of the critical success factors for the company to achieve this 4-percent increase is to grow its share of the North American footwear market. However, with the new store opening and the subsequent increase in costs, as well as the costs related to the sponsorship deals, the management team is projecting a loss for the year.

In addition, to build customer loyalty and promote sales in the retail store, Cloud 9 Ltd. introduced a loyalty program whereby customers earn one point for every $10 that they spend. Customers can then redeem points on-line to receive coupons that can be exchanged for merchandise in the store.

On October 1, 2019, the company took out an additional loan of $3 million with OntarioBank to help fund the store costs, and to purchase additional delivery trucks and vans. This loan is repayable over five years. The company’s other debt relates to loans from one of Ron McLellan’s other companies, which were issued between 1980 and 1993 when the original company was a sole proprietorship. R.A. McLellan extended the repayment date as part of the consideration for the sale.
All inventory is purchased in U.S. dollars. The company provides a 12-month warranty on all footwear. Historical claims have been 2 percent of total sales.

a) List your potential significant risks with your examples in the working paper provided.

b) For each significant risk, identify the account(s) that would potentially be misstated.

Cloud 9 Ltd. has 52 full-time employees. In the retail store, the company employs part-time staff, with casual employees enhancing staffing levels in the busier retail period.

To administer the company’s finances, Cloud 9 Ltd. employs Finance Director, David Collier; Financial Controller, Carla Johnson; and Business Systems Manager, Justin Reeves.

These three employees are entitled to participate in the employee stock option plan and receive stock options in Cloud 9 Inc. if revenue targets are met.

Financial information

Responding to pressure from its parent company, Cloud 9 Ltd. set a goal to increase its revenue by 4 percent for the 2020 fiscal year. One of the critical success factors for the company to achieve this 4-percent increase is to grow its share of the North American footwear market. However, with the new store opening and the subsequent increase in costs, as well as the costs related to the sponsorship deals, the management team is projecting a loss for the year.

In addition, to build customer loyalty and promote sales in the retail store, Cloud 9 Ltd. introduced a loyalty program whereby customers earn one point for every $10 that they spend. Customers can then redeem points on-line to receive coupons that can be exchanged for merchandise in the store.

On October 1, 2019, the company took out an additional loan of $3 million with OntarioBank to help fund the store costs, and to purchase additional delivery trucks and vans. This loan

is repayable over five years. The company’s other debt relates to loans from one of Ron McLellan’s other companies, which were issued between 1980 and 1993 when the original

company was a sole proprietorship. R.A. McLellan extended the repayment date as part of the consideration for the sale.

All inventory is purchased in U.S. dollars. The company provides a 12-month warranty on all footwear. Historical claims have been 2 percent of total sales.

a) List your potential significant risks with your examples in the working paper provided.

b) For each significant risk, identify the account(s) that would potentially be misstated.

Cloud 9 Ltd. has 52 full-time employees. In the retail store, the company employs part-time staff, with casual employees enhancing staffing levels in the busier retail period.

To administer the company’s finances, Cloud 9 Ltd. employs Finance Director, David Collier; Financial Controller, Carla Johnson; and Business Systems Manager, Justin Reeves.

These three employees are entitled to participate in the employee stock option plan and receive stock options in Cloud 9 Inc. if revenue targets are met.

Financial information

Responding to pressure from its parent company, Cloud 9 Ltd. set a goal to increase its revenue by 4 percent for the 2020 fiscal year. One of the critical success factors for the company to achieve this 4-percent increase is to grow its share of the North American footwear market. However, with the new store opening and the subsequent increase in costs, as well as the costs related to the sponsorship deals, the management team is projecting a loss for the year.

In addition, to build customer loyalty and promote sales in the retail store, Cloud 9 Ltd. introduced a loyalty program whereby customers earn one point for every $10 that they spend. Customers can then redeem points on-line to receive coupons that can be exchanged for merchandise in the store.

On October 1, 2019, the company took out an additional loan of $3 million with OntarioBank to help fund the store costs, and to purchase additional delivery trucks and vans. This loan

is repayable over five years. The company’s other debt relates to loans from one of Ron McLellan’s other companies, which were issued between 1980 and 1993 when the original

company was a sole proprietorship. R.A. McLellan extended the repayment date as part of the consideration for the sale.

All inventory is purchased in U.S. dollars. The company provides a 12-month warranty on all footwear. Historical claims have been 2 percent of total sales.

a) List your potential significant risks with your examples in the working paper provided.

b) For each significant risk, identify the account(s) that would potentially be misstated.