IDENTIFY THE ISSUES AND KEY RISK AREAS

Slice Coolers Ltd. (SCL) is a Canadian public alcoholic beverage company that produces, sells, markets and distributes premium brand and value brand alcoholic coolers. SCL's products are sold primarily in Ontario but are now also available in Atlantic and Western Canada. Today is January 10, 2019. You, CPA, are a Senior Accountant at Russell and Hill, LLP (RHL). RHL was recently appointed as SCL's auditors. You and the audit partner have just come back from a meeting at SCL in preparation for the January 31, 2019 year-end. "I would like you to draft the audit plan, including the audit procedures you think we should perform for the key risk areas, and prepare an analysis of any significant accounting issues. Here are excerpts from the draft interim financial statements (Appendix 1), industry information (Appendix II), and notes from my discussions with the CFO (Appendix III). Client acceptance procedures were completed in December when we first accepted this engagement. "SCL implemented a new bonus structure in February 2018. Each member of the senior management team will receive a $10,000 bonus for each 1% increase in volume growth in fiscal 2019. Senior management expects to earn a bonus given the increase in volumes in the current year and the liability will be accrued when a reliable estimate of the obligation can be made. Given the decrease in net income compared to fiscal 2018, the Board of Directors is concerned about public perception of paying the bonus." APPENDIX I SLICE COOLERS LTD. FINANCIAL STATEMENTS STATEMENT OF FINANCIAL POSITION As at (in thousands of dollars) October 31, 2018 (unaudited) January 31, 2018 (audited) Assets $ $ Current Accounts receivable Inventory Prepaid expenses 6,624 4,183 294 11,101 3,520 3,838 322 7,680 Property, plant and equipment Intangible assets Deferred income tax assets 17,012 13,834 2,713 33,559 18,372 6,062 2,918 27,352 $ 44,660 $ 35,032 Liabilities Current $ Bank indebtedness Accounts payable and accrued liabilities Current portion of long-term debt and promissory note $ 2,594 7,686 1,349 11,629 371 4,948 786 6,105 Provisions Long-term debt and promissory note 179 6.342 18.150 171 3.051 9.327 Shareholders' equity Share capital Deficit 35,585 (9,075) 26,510 35,533 (9,828) 25,705 $ 44.660 $ 35,032 APPENDIX I (continued) SLICE COOLERS LTD. FINANCIAL STATEMENTS STATEMENT OF OPERATIONS For the period ended (in thousands of dollars) For the nine months ended October 31, 2018 (unaudited) For the year ended January 31, 2018 (audited) Revenue $ 26,741 $ 30,105 23,110 Cost of sales 20,120 Gross profit 6,621 6,995 Selling, marketing and administration Amortization Other expenses 3,123 1,675 860 5.658 3,377 1,510 637 5,524 Income before tax 963 1,471 Income tax expense/ (recovery) 210 (1,273) Net income $ 753 $ 2.744 Volume growth 6.8% 11.0% Consisting of: Increase / (decrease) in sales volume of SCL brands Increase in sales volume of Dylan brand* -6.1% 100.0% 11.0% * For the three months ended October 31, 2018, sales volume for the Dylan brand was approximately 6,000 hectolitres. APPENDIX II INDUSTRY INFORMATION Consumer Preferences In Canada, the trend has been towards canned alcoholic beverages, especially in value brands. Consumers still prefer a glass bottle for the premium brands, as the aluminum can is perceived to slightly alter the taste of the beverage. As well, the trend has been moving away from alcoholic coolers towards ready-to-serve cocktails. The flavours and types of alcoholic beverages sold change frequently given shifts in consumer tastes. It is also not unusual for some flavours to be unpopular or lose popularity. Distribution The distribution of alcoholic coolers is through the Liquor Control Board of Ontario (LCBO). In March 2018, the LCBO imposed payment term changes that were punitive to alcoholic beverage companies in Ontario by extending its payment terms from the traditional 30 days to 60 days. Government Grant In October 2018, the Ontario provincial government announced that it would discontinue its financial assistance given to alcoholic beverage companies for building and marketing their brands. As a result, fiscal 2019 was the last year that SCL received and recorded the grant of $1,000,000. Listings relate to costs incurred by alcoholic beverage companies to list its products within the LCBO. As long as a product is not discontinued, the alcoholic beverage company holds the listing indefinitely. A listing can be replaced with another product. The LCBO has significantly decreased the number of listings they issue due to what they perceive as "consumer product overload. At January 31, 2018, SCL owned a total of 23 listings that cost a total of $1,896,000. APPENDIX III NOTES FROM PARTNER'S MEETING WITH CFO Dylan Cooler Brand On August 1, 2018, SCL entered into an agreement with Corkscrew Limited (Corkscrew). SCL purchased the Canadian rights to the Dylan Coolers (Dylan) brand of alcoholic coolers for a purchase price of $7.3 million, which included $6.55 million for the Dylan trademark and $750,000 for six listings with the LCBO. The Dylan trademark was registered on June 30, 2015 for a period of 15 years. The purchase price was satisfied by a $4.9 million cash payment on closing and the issuance of a secured promissory note for $2.4 million, which will be repaid over the next four years in equal annual installments of $600,000, plus 5% interest per annum. To complete the transaction, SCL obtained a new $5.8 million term loan from Globex Bank (Globex). The term loan is repayable over seven years and has a floating rate of prime plus 3%. Globex also increased SCL's maximum operating line of credit from $6.5 million to $8.0 million. The operating line is secured by a general security agreement over all of the company's assets other than real property, and some new stricter covenants were introduced. Corkscrew felt that the Dylan brand was struggling and wanted to sell off this under-performing brand. SCL's management was confident that they could turn the brand around and was able to negotiate a quick sale. SCL plans a complete transformation of the Dylan trademark in hopes of reversing a significant decline in sales. In fiscal 2020, SCL's management is planning the launch of three great new ready-to-serve cocktails under the Dylan brand, including Mango Gin and Tonic, Celery Caesar, and Kumquat Cider. All of the current Dylan cooler flavors will be discontinued and replaced with new flavours, such as Raspberry Peach and Pomegranate Punch. Prior to SCL's acquisition, Corkscrew sold approximately 48,000 hectolitres of Dylan alcoholic coolers annually. APPENDIX III (continued) NOTES FROM PARTNER'S MEETING WITH CFO Expansion Plan To expand geographically, SCL established a separate corporation in British Columbia, West Brewco Ltd. (West), with two local investors on November 1, 2018. SCL owns 50% of the West shares, and the other two investors own 30% and 20%. The shareholders' agreement requires that all decisions must be approved by 75% of the owners. No party will be able to pledge, sell, transfer or otherwise mortgage the assets of West. Profits of West will be distributed to SCL and the other investors based on each party's ownership interest in the arrangement. The liability of the shareholders is limited. A total of $750,000 was invested by SCL, and West's operations were up and running at the end of December. Nothing related to West has been recorded in SCL's financial statements. Bottling SCL currently uses an industry standard, returnable glass bottle, which represents the significant majority of volume sales in Canada. The glass bottles are recorded in property, plant and equipment at cost, net of deposit liabilities, and are amortized over their useful lives. To determine useful life, management uses historical trends and internal studies to obtain a reasonable estimate of the rates of return and usage. The glass bottles are currently being amortized over a period of seven years. The net book value of glass bottles at October 31, 2018 was $1,179,000. Alcoholic coolers have a limited shelf life of approximately one year from the date that it was bottled. In December 2018, SCL invested $1,247,000 in new machinery for bottling that produces an average of 75,000 aluminum spill proof' bottles per day. The new bottle combines the shape of a glass bottle with less risk of breakage and a convenient re-sealable top. SCL plans on bottling approximately half of its biggest selling cooler, Buck Coolers, in this new single-use aluminum bottle. Slice Coolers Ltd. (SCL) is a Canadian public alcoholic beverage company that produces, sells, markets and distributes premium brand and value brand alcoholic coolers. SCL's products are sold primarily in Ontario but are now also available in Atlantic and Western Canada. Today is January 10, 2019. You, CPA, are a Senior Accountant at Russell and Hill, LLP (RHL). RHL was recently appointed as SCL's auditors. You and the audit partner have just come back from a meeting at SCL in preparation for the January 31, 2019 year-end. "I would like you to draft the audit plan, including the audit procedures you think we should perform for the key risk areas, and prepare an analysis of any significant accounting issues. Here are excerpts from the draft interim financial statements (Appendix 1), industry information (Appendix II), and notes from my discussions with the CFO (Appendix III). Client acceptance procedures were completed in December when we first accepted this engagement. "SCL implemented a new bonus structure in February 2018. Each member of the senior management team will receive a $10,000 bonus for each 1% increase in volume growth in fiscal 2019. Senior management expects to earn a bonus given the increase in volumes in the current year and the liability will be accrued when a reliable estimate of the obligation can be made. Given the decrease in net income compared to fiscal 2018, the Board of Directors is concerned about public perception of paying the bonus." APPENDIX I SLICE COOLERS LTD. FINANCIAL STATEMENTS STATEMENT OF FINANCIAL POSITION As at (in thousands of dollars) October 31, 2018 (unaudited) January 31, 2018 (audited) Assets $ $ Current Accounts receivable Inventory Prepaid expenses 6,624 4,183 294 11,101 3,520 3,838 322 7,680 Property, plant and equipment Intangible assets Deferred income tax assets 17,012 13,834 2,713 33,559 18,372 6,062 2,918 27,352 $ 44,660 $ 35,032 Liabilities Current $ Bank indebtedness Accounts payable and accrued liabilities Current portion of long-term debt and promissory note $ 2,594 7,686 1,349 11,629 371 4,948 786 6,105 Provisions Long-term debt and promissory note 179 6.342 18.150 171 3.051 9.327 Shareholders' equity Share capital Deficit 35,585 (9,075) 26,510 35,533 (9,828) 25,705 $ 44.660 $ 35,032 APPENDIX I (continued) SLICE COOLERS LTD. FINANCIAL STATEMENTS STATEMENT OF OPERATIONS For the period ended (in thousands of dollars) For the nine months ended October 31, 2018 (unaudited) For the year ended January 31, 2018 (audited) Revenue $ 26,741 $ 30,105 23,110 Cost of sales 20,120 Gross profit 6,621 6,995 Selling, marketing and administration Amortization Other expenses 3,123 1,675 860 5.658 3,377 1,510 637 5,524 Income before tax 963 1,471 Income tax expense/ (recovery) 210 (1,273) Net income $ 753 $ 2.744 Volume growth 6.8% 11.0% Consisting of: Increase / (decrease) in sales volume of SCL brands Increase in sales volume of Dylan brand* -6.1% 100.0% 11.0% * For the three months ended October 31, 2018, sales volume for the Dylan brand was approximately 6,000 hectolitres. APPENDIX II INDUSTRY INFORMATION Consumer Preferences In Canada, the trend has been towards canned alcoholic beverages, especially in value brands. Consumers still prefer a glass bottle for the premium brands, as the aluminum can is perceived to slightly alter the taste of the beverage. As well, the trend has been moving away from alcoholic coolers towards ready-to-serve cocktails. The flavours and types of alcoholic beverages sold change frequently given shifts in consumer tastes. It is also not unusual for some flavours to be unpopular or lose popularity. Distribution The distribution of alcoholic coolers is through the Liquor Control Board of Ontario (LCBO). In March 2018, the LCBO imposed payment term changes that were punitive to alcoholic beverage companies in Ontario by extending its payment terms from the traditional 30 days to 60 days. Government Grant In October 2018, the Ontario provincial government announced that it would discontinue its financial assistance given to alcoholic beverage companies for building and marketing their brands. As a result, fiscal 2019 was the last year that SCL received and recorded the grant of $1,000,000. Listings relate to costs incurred by alcoholic beverage companies to list its products within the LCBO. As long as a product is not discontinued, the alcoholic beverage company holds the listing indefinitely. A listing can be replaced with another product. The LCBO has significantly decreased the number of listings they issue due to what they perceive as "consumer product overload. At January 31, 2018, SCL owned a total of 23 listings that cost a total of $1,896,000. APPENDIX III NOTES FROM PARTNER'S MEETING WITH CFO Dylan Cooler Brand On August 1, 2018, SCL entered into an agreement with Corkscrew Limited (Corkscrew). SCL purchased the Canadian rights to the Dylan Coolers (Dylan) brand of alcoholic coolers for a purchase price of $7.3 million, which included $6.55 million for the Dylan trademark and $750,000 for six listings with the LCBO. The Dylan trademark was registered on June 30, 2015 for a period of 15 years. The purchase price was satisfied by a $4.9 million cash payment on closing and the issuance of a secured promissory note for $2.4 million, which will be repaid over the next four years in equal annual installments of $600,000, plus 5% interest per annum. To complete the transaction, SCL obtained a new $5.8 million term loan from Globex Bank (Globex). The term loan is repayable over seven years and has a floating rate of prime plus 3%. Globex also increased SCL's maximum operating line of credit from $6.5 million to $8.0 million. The operating line is secured by a general security agreement over all of the company's assets other than real property, and some new stricter covenants were introduced. Corkscrew felt that the Dylan brand was struggling and wanted to sell off this under-performing brand. SCL's management was confident that they could turn the brand around and was able to negotiate a quick sale. SCL plans a complete transformation of the Dylan trademark in hopes of reversing a significant decline in sales. In fiscal 2020, SCL's management is planning the launch of three great new ready-to-serve cocktails under the Dylan brand, including Mango Gin and Tonic, Celery Caesar, and Kumquat Cider. All of the current Dylan cooler flavors will be discontinued and replaced with new flavours, such as Raspberry Peach and Pomegranate Punch. Prior to SCL's acquisition, Corkscrew sold approximately 48,000 hectolitres of Dylan alcoholic coolers annually. APPENDIX III (continued) NOTES FROM PARTNER'S MEETING WITH CFO Expansion Plan To expand geographically, SCL established a separate corporation in British Columbia, West Brewco Ltd. (West), with two local investors on November 1, 2018. SCL owns 50% of the West shares, and the other two investors own 30% and 20%. The shareholders' agreement requires that all decisions must be approved by 75% of the owners. No party will be able to pledge, sell, transfer or otherwise mortgage the assets of West. Profits of West will be distributed to SCL and the other investors based on each party's ownership interest in the arrangement. The liability of the shareholders is limited. A total of $750,000 was invested by SCL, and West's operations were up and running at the end of December. Nothing related to West has been recorded in SCL's financial statements. Bottling SCL currently uses an industry standard, returnable glass bottle, which represents the significant majority of volume sales in Canada. The glass bottles are recorded in property, plant and equipment at cost, net of deposit liabilities, and are amortized over their useful lives. To determine useful life, management uses historical trends and internal studies to obtain a reasonable estimate of the rates of return and usage. The glass bottles are currently being amortized over a period of seven years. The net book value of glass bottles at October 31, 2018 was $1,179,000. Alcoholic coolers have a limited shelf life of approximately one year from the date that it was bottled. In December 2018, SCL invested $1,247,000 in new machinery for bottling that produces an average of 75,000 aluminum spill proof' bottles per day. The new bottle combines the shape of a glass bottle with less risk of breakage and a convenient re-sealable top. SCL plans on bottling approximately half of its biggest selling cooler, Buck Coolers, in this new single-use aluminum bottle