INTRODUCTION In this case study, you are a graduate working for W&S Partners, a Canadian accounting firm with offices located in each of the major Canadian cities. W&S Partners has just been awarded the December 31, 2023, statutory audit work for Alpine Bags Ltd. The audit team assigned to the client is: Partner, J.M. Wadley; Audit Manager, Sharon Gallagher; Audit Senior, Josh Thomas; and IT Audit Manager, Mark Batten. Prior-year audits were conducted by Ellis & Associates. As part of the change of auditors process, J.M. Wadley met with R.J. Ellis (Managing Partner, Ellis & Associates) to discuss the acceptance of Alpine Bags Ltd. as a client and to inquire about access to Ellis & Associates working papers. In the discussion, R.J. Ellis stated that there were no issues that W&S Partners should be aware of before accepting the client or commencing the work. Alpine Bags Ltd. Company Background Founded in 1980 by Ron McLellan, the Toronto-based company was a manufacturer and retailer of rugged, durable backpacks designed for active climbers. In 1993, Alpine Bags Inc. (a publicly listed Canadian company) purchased the original company from Ron McLellan and renamed it Alpine Bags Ltd. As part of the sale agreement, Ron McLellan was appointed to the Alpine Bags Ltd. board of directors. The parent company, Alpine Bags Inc., has wholly owned subsidiaries in the United States, the United Kingdom (UK), Germany, China, and Brazil, and has built a reputation around the fact that its bags are both stylish and durable. The company promotes itself using its well-known tagline Our bags are so durable, it's the only one you'll ever need. Alpine Bags Ltd. is primarily a wholesaler of backpacks to its main customers: David Jones, Myer, Foot Locker, and Rebel Sports. Inventory Management Alpine Bags Ltd. receives the majority of its inventory from the production plant in China, with the remainder coming from the United States. All inventory is purchased free on board (FOB) shipping point, which means Alpine Bags Ltd. takes ownership of the products once the international courier accepts the goods for delivery. The inventory is sent to the main warehouse in Richmond, B.C., which is linked to retailers via an electronic inventory system. When retail inventory levels get low, the company ensures deliveries are made using its own transport trucks, thus ensuring control throughout the entire process. Inventory logistics have run smoothly to date, apart from some interruptions and delays due to geo-political unrest in the Spring of 2023. Sales and Promotion A specific marketing campaign was initiated in 2023 to promote and build the Alpine Bags brand in Canada. The Canadian company was granted permission from its parent entity to sponsor the Canadian Olympic team for the 2023 games. Under this sponsorship agreement, Alpine Bags Ltd. is to provide backpacks for the team as well as having sole merchandising rights. The agreement also includes general advertising rights at the stadium. In a separate contractual arrangement, Alpine Bags Ltd. has signed Yasmin Finn, one of Canada's most promising Olympians, as spokesperson for the brand. This arrangement allows Alpine Bags Ltd. to use Yasmin's image to promote and build the brand in Canada. In February 2023, Alpine Bags Ltd. launched its new product line, which included the Heavenly lightweight backpack and the Altitude large capacity backpack. Advertising campaigns and media coverage have been very successful and sales of the Heavenly backpack have steadily increased. For Alpine Bags Ltd., the Heavenly now makes up 25 percent of total sales. The Altitude backpack was marketed in the stadiums during the Olympic games as well as heavily advertised using Yasmin Finn's image. Due to a decreased viewership of the Olympic games, sales of the Altitude were unimpressive and, as a result, Alpine Bags still has a large amount of inventory in its warehouse. To further establish the brand, the first Alpine Bags retail store was opened in Toronto, Ontario, on June 1, 2023. The store operates on a just-in-time inventory system linked with the main warehouse in Richmond, B.C. However, the management team reports that there have been a few hiccups in determining ideal inventory quantities for the store to allow optimum availability of merchandise to the customers. There have also been some thefts of merchandise from the store and, in order to reduce inventory loss by theft, the company has installed closed-circuit television cameras. The store was operating on reduced hours beginning in October 2023 due to a pandemic (see details under the Personnel section). Personnel Alpine Bags 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, Alpine Bags Ltd. employ Finance Director, Andrew Jones; Financial Controller, Debbie Smith; and Business Systems Manager, Sophia Santana. These three employees are entitled to participate in the employee stock option plan and receive stock options in Alpine Bags Inc. if revenue targets are met. Beginning in October 2023, there was a temporary layoff due to a pandemic. The layoff was attributed to an anticipated drop in demand due to the inability for consumers to travel during the last part of the fourth fiscal quarter, and a corresponding anticipated drop in demand for the products Alpine Bags sells. The company was still able to sell online internationally during the pandemic. Approximately 15% of the workforce was laid off. The layoff was limited to temporary staff that provided support in the warehouse area. As of February 2024, Alpine Bags management did not plan to call back temporary support. They recognized that many of the operations could be performed by having employees work slightly longer schedules for the existing demand. An employee satisfaction survey was conducted during June 2023 for the first time. The results indicated that employee morale was lower than anticipated. Management had set up a task force to identify ways to improve morale in order to retain key staff. Financial Information Responding to pressure from its parent company, Alpine Bags Ltd. set a goal to increase its revenue by 4 percent for the 2023 fiscal year. Management bonuses are based on the company's goal of reaching the 4 percent increase. One of the critical success factors for the company to achieve this 4-percent increase is to grow its share of the North American outdoor backpack 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 was already projecting a loss for the year, and that was prior to the pandemic. In addition, to build customer loyalty and promote sales in the retail store, Alpine Bags Ltd. introduced a loyalty program whereby customers earn one point for every $10 that they spend. Customers can then redeem points online to receive coupons that can be exchanged for merchandise in the store. On October 1, 2022, the company took out an additional loan of $3 million with Ontario Bank 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. The company provides a 12-month warranty on all bags. Historical claims have been 2 percent of total sales. Information Systems Alpine Bags Ltd. has made two notables changes in their information systems during 2023 as follows: 1. The introduction of artificial intelligence to set pricing levels. Prices fluctuate within a predetermined range prior to the customer placing orders and is based on market activity; and, 2. A migration to cloud storage effective October 1, 2023. No concerns have been noted during preliminary discussions as a result of the changes. During the Summer 2023 Olympics, Alpine Bags experienced a brief technology outage (less than 8 hours during non-processing hours). The company immediately engaged a crisis management team from a large national accounting firm to consult on the situation. It was identified as a cyber-attack and the hacker requested a ransom. Alpine Bags was required to pay a ransom in Bitcoin to the hackers so they would decrypt the server and provide management with access to their own data once again. No complaints have been noted by either suppliers or employees (both of whom have been informed of the situation) with regards to compromised data or personally identifiable information. In addition, all applications were immediately restored to the prior full day of backup data.

Question 1:

Identify and describe two potential inherent risks that could occur in each of the five processes described above i.e. inventory management, sales and promotion, personnel, financial information, and information systems. For those potential risks, identify the financial statement accounts that are affected and the related assertions. Document your answers using the table format below.

Question 2:

Assume that you have been asked to conduct substantive testing for Alpine Bags inventory and sales transactions. Briefly discuss one appropriate sampling method each that you can use for inventory and sales. Justify your choice.