Last year was a challenging one for Samuel's Snowboards Inc. (SSI), a large private company that manufactures snowboards and skateboards. Competition has increased in the industry and, in the skateboard segment in particular, SSI lost significant market share. The poor performance of the skateboard segment, which represented a major line of business, led to a recent decision to discontinue this segment and focus on manufacturing snowboards only.

You, CPA, are the audit senior on the SSI engagement. SSI has been a client of your firm for three years. Each year, the audit has gone smoothly. You recently met with Jackson Churchill, the chief financial officer of SSI, to review the draft financial statements for 2020. Jackson noted that sales and earnings were much lower in 2020 than had been budgeted. He expressed concern that this will surely displease the shareholders, who rely on SSI for healthy quarterly dividend payments. He explained to you that management will also be disappointed because year-end bonuses are, in part, calculated based on income from continuing operations.

It is now January 2021, and you are ready to start the year-end audit work for SSI's December 31 year end. SSI reports its financial statements in accordance with accounting standards for private enterprises (ASPE). SSI's tax rate is 20%.

Question #1

You decide to start your work by performing some analytical procedures on the yearend financial statements. You notice that fourth-quarter sales are much higher than budgeted and much higher than sales reported in the fourth quarter of the prior year, as shown in the chart below: