Hanzel & Gretel (HG) is a privately-owned Canadian company that owns seven candy shops with factories throughout South Western Ontario. The business makes gingerbread, cake, confection, candy, and many other treats.

HG was founded in 1985 during the boom in the mass produce era of confectionaries. The business was founded by father of the current President, Sam Gretel. Sam has degrees in both business and engineering having worked with two large companies before returning to the family business and eventually acquiring 100% ownership of HG (100,000 common shares).

Company background:

- After 30 years of profitability, HG has reported losses for the past three years and the Sams dad is pressuring him to improve performance

- Several changes have occurred this year that will require new, or revised, accounting treatments that are complicated in nature, such as an asset retirement obligation for one of the shops

- Sams wife, Kyra has done the books for HG since they married in 2012, she does not have a formal accounting education and has only worked at HG

- The auditor typically recommends 15 20 adjustments to the financial statements as prepared by Kyra

- Sam and Kyra both have signing authority for cheques, but Sam doesnt review Kyras purchases and vice versa

- Each store manager is required to submit to Kyra and Sam their inventory requests, however, since Kyra and Sam do not review each others purchases, inventory is often purchased twice

- Each shop has their own management team, all the managers have been there for 15 + years

- Each shop manager is required to provide Sam and Kyra with a monthly balance sheet and income statement, detailing any variances month to month and budget to actual > 5%

A local accounting firm, FairyTale LLP, has audited financial statements and prepared income tax returns for several years. The companys lender requires audited reviewed financial statements.

REQUIRED

You, auditor, work in the Audit Group at FairyTale LLP. The partner, Jacob Grimm has asked you prepare an audit planning memo, you must consider the following:

- Risk assessment for the engagement: high, medium or low, why? Please provide identify four key risks and why/how they would increase or decrease risk.

- Approach for the engagement: substantive approach, controls-based approach or combined

- Materiality for the engagement: what would you choose as a base and why? What factor would you use and why?