It is August 15, 2023, and you, CPA, are called into the office of Patricia Gonsalves, a partner at Princess & Gonsalves public accounting firm. Patricia begins, "We have started our field work on the audit of Enterprise Technology Systems Inc. (ETS), which has operations all across the country. ETS is primarily engaged in the sale of software and new and refurbished hardware. "During the audit, the staff person in charge of the engagement left the firm to pursue another opportunity. They completed the initial planning, but I want you to evaluate the work done to date (Appendix I) to identify any issues related to the procedures already completed, and additional procedures that need to be performed. Please also provide recommendations on any accounting issues you identify in the June 30, 2023, year-end file. "Although ETS has experienced losses in some years, management is expecting to be profitable going forward due to the company's new line of business selling refurbished servers. ETS has been trading on the TSX-V (stock exchange for small venture companies) for about five years now and reports under International Financial Reporting Standards (IFRS). "Finally, ETS implemented some new IT controls in an effort to make the system more automated (Appendix II). Please evaluate the effectiveness of the controls and provide recommendations on how management can improve, as well as explain how these controls might affect our audit."

 

 

 

 

Cash | have obtained copies of the bank reconciliation and the bank statement as at June 30, 2023. Appendix |Excerpts from working paper file Enterprise Technology Systems Inc.Bank reconciliationAs at June 30, 2023 | Balance per bank statement ! Less: outstanding chequesCheque Date10/15/20226/15/20236/16/20236/16/20236/16/20236/25/20236/25/20236/25/2023 6/25/2023 (7,503) Cheque #101008112233112244*112266*12277112288112299*112310112321 |I|i|lili|lIr|II.i!iI C Agreed to bank confirmation * Vouched to copy of cancelled chequev Agreed to statement of financial position Bank balance per general ledger $ (132,694) (8,465)(6,465)(88,729)(23,410)(3,760)(9,383)(145,891) 798,000 Central Ontario Bank of Money Opening balancePayroll — commissionsPayroll — regularCheque 112166Frank's SupermarketReceiver General —GST/HST refundEnding balance Receipts $54,233$78,777 Payments $196,771$566,792$100,208 Date06/21/202306/24/202306/24/202306/27/202306/27/202306/28/2023 06/30/2023 '$ 1,224300C S ——————————— | Balance$1,955,061$1,758,290$1,191,498$1,091,290$1,145,523$1,224,300 $1,224,300 Appendix | (continued)Excerpts from working paper file Accounts receivable| reviewed the aged receivables and sent out confirmations as indicated below. | pickedcustomers that, according to management, would be quick to respond. All confirmations have been returned and no issues were noted. ~ # of days outstanding Customer ' Balance | Balance pername 0-30 31-45 46-60 | 61-90 90+ | per listing| confirmation Difference Frank'sSupermarket 12,456_ | 24,000 36,456 36,456 Ng??s"'" = 50,000 18,000 68,000 68,000 —Randall 765,999 765.999 MNo confirmationStevens Inc. sentCupcake Girls 48,000 48,000 48,000 -Twins _ 1,750,000 1,750,000 MNo confirmationTherapeutics sentKay Plumbing 280,868 135,678 416,546 416,546 -9841236 Inc. 3,250,000 3,250,000 ° °°"?rma;g:1"tFarrow & No confirmationDeJaegher 499,999 499,999 SlBeks Todls 299,000 299,000 299,000 -ToolsTotal 6,559,322 349,000/ 135,678 42,000 48,000/ 7,134,000 + v Agreed to statement of financial position Therefore, we have obtained comfort over the existence and accuracy, valuation, andallocation of accounts receivable. There is no allowance for doubtful accounts at yearend and this appears reasonable. Convertible debt ETS borrowed $4 million from PIC Investments (PIC) and recorded it as long-term debton the statement of financial position. PIC can convert the debt into 10,000 ETScommon shares at any time, which represents a minimal shareholding of ETS. The debtwas issued on January 1, 2023, and bears interest at 6%, payable annually. The debtwill mature on December 31, 2027. PIC was willing to provide the loan at 7% without theconversion clause. APPRENUIX | ([Conunuea)Excerpts from working paper file Inventory ETS buys used or broken point-of-sale items (cash registers, bar code scanners, and soon), which it then repairs and sells. Any item that requires significant work or new partsis scrapped. Inventory is reclassified from parts to scrap in the accounting records whenETS determines that the problems are not worth fixing. | attended the inventory count on June 30, 2023, and completed counts of all items frominventory record sheets to floor with the following results: Units Units per per ETS Total cost test count DifferenceStationary scanners 2,007 $ 404,842 2,009 (2)Broken registers 626 585,934 623 3Refurbished servers 372 208,994 372 0Portable scanners 452 214 411 452 0Debit machines 194 236,187 194 0Scrap 403 199,101 403 0Total Inventory $ 1849469 V v Agreed to statement of financial position Given that my tests were relatively close to the figures provided, | concluded that therewere no concerns with the inventory. New line of business During the year, ETS started selling servers they had refurbished. This new line ofbusiness has proven to be very popular and ETS has sold approximately 2,000 serversthis year, with revenue totalling about $5 million. Included in the price of the server is atwo-year maintenance plan provided by ETS. Refurbished servers generally sell for$2,200 installed. Similar maintenance plans retail for $550. ETS records the entirerevenue when servers are shipped to customers. After delivery, ETS installs the servers and asks the customers to sign an approval formacknowledging that the servers interface properly with their system. On average, ETSspends two weeks installing each server and ensuring it interfaces properly with thecustomer's system. ETS requires payment for the $2,500 sales amount within 30 days of shipment.Collection rates have been strong thus far. Appendix ISystem notes provided by chief financial officer Payroll We used to have an entire team reconciling commissions paid to our sales staff basedon their monthly sales, but have now automated this process. We implemented acontrol to ensure that the 2% commission paid to everyone matches the amountscalculated by the system. If the commission calculated does not match the payrollsystem, the system will automatically suspend the payment until variances areexplained. Here is the May 2023 report. | haven't had a chance to look into the variance. Sales for the monthCommission rate 8,559,3222% 196,77125,585 $ Expected commission 3 171,186Commission per payroll system 38 Variance Result: Difference greater than zero.Do not process commission payment. Purchasing We used to spend hours signing cheques and reviewing supporting documentation.Now accounts payable approves invoices and uploads them into the system andgenerates a report. | access the report through the system and indicate "Yes" or "No" inthe approved column. Once | enter "Yes," my signature is printed automatically. If |enter "No" in the approved column, the invoice goes unpaid until | change the status. |included an example approval report below. Company Date Amount Invoice # Approved CommentBusiness 06/25/2023 145,891 A14a63 No Invoice notEquipment Inc. attached We R Furniture 06/27/2023 4,651 B124T YesBroken Units 06/28/2023 1,762 123nht YesTrain the Trainer 06/28/2023 9,414 BDI1TH6573 Yes Appendix Il (continued)System notes provided by chief financial officer Sales process description We process sales on a system called Sell It. Once a customer places an order, thesales representative enters the relevant information (customer name, address, itemcode, number of items, and discount, if applicable) into the system. Then, the followingautomated checks are performed: * The system automatically checks the customer name against the master list todetermine if it is a new customer. If new, the system generates an email asking thesales manager to approve the addition of the customer to the master list. » |If the sale pushes a customer over its approved credit limit, the system automaticallydenies the sale. Credit limits are stored with the master customer list. The master customer list is located on the server and its file path is detailed in the ITpolicy manual. Once the sale has been approved, the system will send a message to the shippingdepartment, which will get the items ready for shipment. After shipment occurs, a shipping number and date are added to the sales record and anotice is sent to the sales representative. This allows the sales representative to informthe customer of the expected delivery date. Sales for shipped orders are run through batch invoicing every Friday, and until then thesales records are stored on the server in a file folder called "Shipped but not invoiced." On Friday, the invoicing process extracts the data from the sales records and generatesinvoices and the necessary accounting entries. The files are moved to the "Invoiced"folder. The system produces a report that lists the time and date when an order wascreated or amended. However, the report is so long that we never look at it. At the end of the month, the new amounts recorded in the "Invoiced" folder are totalledto determine the monthly sales for each sales representative and to calculate salescommissions. One of the benefits of the system is that it lets us track employee performance andupdate personnel files each month. We keep the master personnel files in the samedirectory as the master customer list. That way, all the information our controller needsis in one place. We strongly believe that all employees, from clerks to vice presidents, should be treatedthe same, so we have provided all of our employees with the same server and systemaccess. We ask them to only change data they are responsible for