Fresh Delicious Foods Inc. started in the kitchen of a family home in the suburbs of Minneapolis. Initially the ingredients were purchased, by Miriam the owner, for these all-natural food recipes from the local grocery store. The family used their family members and their neighbors as their taste testers. Their food products were so good, the local stores and convenience stores were glad to distribute the products to their customers on a small-scale basis. Local demand increased significantly. More local convenience stores and grocery stores discovered the products and became distributors. The family moved the expanding business into a larger facility and hired a few more workers. While their competitors sales were flat or declining, Fresh Delicious Foods Inc.s sales were on the rise. The family opened a boutique division named Best Fresh Gourmet, specializing in freshly manufactured, one-serving packages meant for consumption no later than 3 days after production. They sell this product at 3 times the cost of their other products and by special order only through their new website. Demand is high, but waste has been an issue. Miriam is the owner, but is not involved in operations. Patty is the president and general manager of the operation, and is Miriams oldest friend. Patty has been very proactive in growing the business. She has met with her banker to discuss expanding the facilities and equipment with another $150,000 loan. Their first loan for $150,000 was secured by the industrial size, food production equipment purchased with the loan. The banker now demands an audit of the corporate financial statements before releasing any more loans to the company. Patty has offered to place the corporate account receivables up as collateral to secure a second loan. Based on revenue projections by her sister Sallys sales team, Patty believes that the company will not have trouble paying down the loan in a short period of time. Olive manages the production operations. She oversees the inventory, production, and shipment of food products. The Best Fresh Gourmet line has taken almost all of her attention lately. The winter holidays are approaching and sales demand based on forecasts from the sales force are higher than ever. Attaining fresh, raw ingredients is more difficult in the winter months. If any of the fresh ingredients are delayed, production comes to a standstill. There has been significant inventory waste as a result. Olives assistant, Alan, monitors the production and shipment of Fresh Delicious Foods regular line of products. Alan takes pride in his work and is involved in every facet of the operation. With only one other warehouse employee to help, Alan personally is involved in preparing and approving all inventory records. Alan ensures that very little finished inventory sits in the warehouse. However, the shipping dock always seems to be full of returned food items that should be restocked. When Olive asks him about it, Alan laughs and tells her that "first in first out" applies to food returns as well. Olive smiles and just accepts that answer. Sally is not very good at understanding accounting. The sisters placed Sally in charge of sales. She manages a sales team of 12 salesmen in Illinois, Indiana, and Wisconsin. Her fear of flying and poor driving skills limit her ability to get around to the areas outside of Minneapolis. As a result, she has placed a lot of faith in her sales team. The sales team complained last year that they did not like waiting for their commissions until after bookkeeping calculated the actual revenues. In order to keep their spirits fired up, Sally has her sales people project what their sales will be in the upcoming quarter and she pays commissions in advance on those

projections. The sales team loves her and Sally loves their approval. Sally has noticed that the projections typically are off by 11% on average. At this time, the receivables represent 29% of the corporate assets. The Minneapolis retail chain Trader Stores, Co. is Fresh Delicious Foods largest buyer. They alone represent 31% of overall sales and usually pay within 30 days. However, Trader Stores is facing a major lawsuit. The legal fees are eating into their cash reserves and they are facing some store closures. The accounts receivable aging indicates that 38% of the receivables are 30 days or less. Twenty-two percent are 31-60 days. Twenty-one percent of the receivables are 61-90 days old. Ten percent are 90-120 days. The remaining receivables are older than 120 days. Patty has not written off any of the receivables, nor will she. Sales are projected to steadily grow at 16% next year if the company does not expand its facilities. With the expansion, sales are projected to rise 26%, with the most significant jump in the last quarter after expansion is completed and holiday sales pick up. Your Role: You and your firm, Audit Crew CPAs, have never audited a food manufacturer. Although it is late in the year to be accepting a new calendar year-end audit, you need the work and have the time to devote to the audit before your 2-week ski vacation in February. You begin the audit process just prior to year-end by sending your audit manager, Marvin, and two audit staffers, Ben and Maureen, out to the client. They spend time assessing the client and planning the audit. Audit Staff: Marvin: Recently joined your firm as the long time friend of a senior partner. Youve noticed that Marvin has been parked on other audits to help build his book of clients, however he does not frequently appear to be actively engaged or interested in his clients. Ben: Junior audit staffer, has been with the firm less than 1 yar but has done well so far. While on the audit Ben develops a crush on the administrative professional at Fresh Delicious. However, he does not act on his feelings until after the audit has taken place and you are unaware of this relationship until recently when he brought the person to your company picnic. Maureen: Junior audit staffer with 2 years experience in auditing manufacturing firms. She tends to over-audit and frequently focuses on digging too deep into areas unnecessarily if not closely supervised. She believes this makes her a very thorough auditor and generally that is true, but staying within budget on a tight audit schedule is not her skill. Other Observations: During the first month of field work after year end, Ben and Maureen note that the food bags piled high on the docks are marked Returned. One employee is seen throwing bags of the premium Best Fresh Gourmet food into the dumpster in the morning and pulling it out and throwing it into Alans car during the employee lunch hour. Marvins new best friend, Alan, was married to Fresh Delicious Food Inc.s owner, Miriam, 4 years ago. Alan is also good friends with the banker from whom Patty is seeking the loan. Marvin is unaware of the relationship between Alan and the banker. Marvin has talked about some of the details of the audit to Alan over a few beers.

Assignment Requirements: 1) Prepare a written paper as though you are preparing for the engagement. This type of document would be included in your long term client files. The following sections should appear in the paper. Include a title page, proper headers, headings and references list in APA 7th edition format. a. Introduction (brief) explaining the purpose of the report, the client, and the plans for audit approach. b. Planning: Include your understanding of the client, c. Risk Assessment: should include highlighting those areas of greatest concern contributing to higher risks if they are present. d. Initial Findings & Recommendations: i. Identified findings should be immediately followed by a stand alone recommendation ii. Findings should be bucketed into themes to create logical audit flow through function or topics. e. Audit Staff: Assess current audit staff and their perceived capabilities or appropriate staffing on this engagement. If a recommendation for change is to be made, include it here and support with reasons why. 2) Look back through the chapters covered during this term, answer following questions on the following page. The page can be copied into a separate word document and each answer should be typed under the question in the space provided. Include references to support your answers and a reference list.

1. Discuss how the SEC has influence (if any) over the audit of Fresh Delicious Foods, Inc. Solution: 2. Discuss the 4 stages of the audit and the major activities performed by the auditor in each phase. Give an example of how each of these specifically applies to the Fresh Delicious Food, Inc audit. For instance, examine the apparent internal control weaknesses and possible negative outcome of each. Solution: 3. Describe the CPA firms responsibilities related to communications regarding internal control matters. Include what internal control issues you can identify (at least 4) Solution: 4. You decide to address the accounts receivables through confirmations. Discuss the types of confirmations and the forms you will implement and why. Solution:

Samples sizes vary from one audit to another. Identify major factors affecting the sample size for confirmation of the Fresh Delicious accounts receivable. Solution: 6. Discuss the CPA firms legal liability concerns for this audit if they make a material unintentional or intentional mistake. Solution: