Leo Lorenzo & Sons Ltd. (LLS) is an owner-managed machinery manufacturer that specializes in producing small electric utility tractors for commercial use in Winnipeg, Manitoba. Leo Lorenzo, the sole shareholder, started the business in 2012; his son, Matthew, is the controller. LLS recently won a bid from a large client. To ensure that LLS can deliver this large order, the new client wants to review the audited financial statements before finalizing the contract. In particular, they have indicated that they are interested in seeing the extent of LLS revenue. You are an associate articling with the firm of Hamilton & Warren, Chartered Professional Accountants (HW). LLS has recently engaged HW as the auditor for the company. In prior years, LLS's financial statements were audited by a local public accounting firm. Jennifer Hamilton, the partner responsible for the file has already dealt with all client acceptance issues. It is now October 31, 2019. You are meeting with Jennifer, who provides you with the following details. Jennifer: Here are the draft September 30, 2019, financial statements (Exhibit 1). I met with Leo and Matthew last week to discuss the audit; here are my meeting notes, with some general information about LLS (Exhibit II). I would like you to prepare the audit planning memo for this new client. Please ensure that the overall financial statement risk, materiality determinations, and the preliminary analytical review of the financial statements are included. Your analysis should tie into the key accounts and assertions impacted. You do not have to provide audit procedures based on your analysis, as I will do that myself. As inventory is LLS's largest asset, another associate, Akari Sato, attended the inventory count on September 30. He has documented his observations of the count and the procedures he performed (Exhibit ill). I would like you to develop the follow-up audit procedures we will perform for each key inventory account assertion. As well, I would like you to review Akari's observations of the count, and identify the risks and control improvements related to inventory count procedures that we will communicate to the client, Akari has already sent out the accounts receivable and legal confirmations. Here is a summary of the results (Exhibit IV). He didn't have time to discuss the results with the client, so you will have to do all of the follow-up work. If you identify any potential adjustments to the financial statements, please prepare them, so I can add them to the summary of identified misstatements. Also, please explain what audit procedures you will perform related to the accounts receivable and legal confirmation results. Boss Lad Comparative Financial Statements As a September 30, 2019 BALANCE SHEET 2018 Dra) Audited E E ASSETS Current assets Cash Short-term investments Accounts receivable Prepaid expenses Inventory 30.930 80.000 47.89 30.000 174.567 13.778 531343 19.03 Property, plant, & equipment 300 755 30189 E 1.126 LIABILITIES AND SHAREHOLDER'S EQUITY Current abs Accounts payable and accus Income taxes payable Current portion of note payable E 236.515 370,990 30.087 20.000 Bank loan Other abilities (Note 1) 155.000 230.000 57 000 7280 Shareholder's quity Retained caringe 100 100 019 Notes: Note 1 - This includes contingent les Exhibit i continued Boss Lad Comparative Financial Statements As a September 30, 2019 STATEMENT OF INCOME 2019 2018 (Audited Revenue Cost of goods sold 3,500,000 1437.900 E 3.115.400 1414 419 Gross profit 2.052.100 1.700.981 25.745 19,878 30.123 34 567 24.000 Expenses Advertising & promotion Amortization Automobile Insurance Interest on notes payable Office & Supplies Professional fees Repairs & maintenance Salaries Travel Units 24.000 20.000 12.54 45.875 1.190.345 8.675 167578 42.345 25,876 123.450 987.543 4.981 124 984 Income before totes Gaidos) on investments Income taxes 445.313 6786 276,130 2.564 24.755 253.929 Net income after tax Leo Lorenzo & Sons Ltd. (LLS) is an owner-managed machinery manufacturer that specializes in producing small electric utility tractors for commercial use in Winnipeg, Manitoba. Leo Lorenzo, the sole shareholder, started the business in 2012; his son, Matthew, is the controller. LLS recently won a bid from a large client. To ensure that LLS can deliver this large order, the new client wants to review the audited financial statements before finalizing the contract. In particular, they have indicated that they are interested in seeing the extent of LLS revenue. You are an associate articling with the firm of Hamilton & Warren, Chartered Professional Accountants (HW). LLS has recently engaged HW as the auditor for the company. In prior years, LLS's financial statements were audited by a local public accounting firm. Jennifer Hamilton, the partner responsible for the file has already dealt with all client acceptance issues. It is now October 31, 2019. You are meeting with Jennifer, who provides you with the following details. Jennifer: Here are the draft September 30, 2019, financial statements (Exhibit 1). I met with Leo and Matthew last week to discuss the audit; here are my meeting notes, with some general information about LLS (Exhibit II). I would like you to prepare the audit planning memo for this new client. Please ensure that the overall financial statement risk, materiality determinations, and the preliminary analytical review of the financial statements are included. Your analysis should tie into the key accounts and assertions impacted. You do not have to provide audit procedures based on your analysis, as I will do that myself. As inventory is LLS's largest asset, another associate, Akari Sato, attended the inventory count on September 30. He has documented his observations of the count and the procedures he performed (Exhibit ill). I would like you to develop the follow-up audit procedures we will perform for each key inventory account assertion. As well, I would like you to review Akari's observations of the count, and identify the risks and control improvements related to inventory count procedures that we will communicate to the client, Akari has already sent out the accounts receivable and legal confirmations. Here is a summary of the results (Exhibit IV). He didn't have time to discuss the results with the client, so you will have to do all of the follow-up work. If you identify any potential adjustments to the financial statements, please prepare them, so I can add them to the summary of identified misstatements. Also, please explain what audit procedures you will perform related to the accounts receivable and legal confirmation results. BOSS LTD is an owner-managed machinery manufacturer that specializes in producing small electric utility tractors for commercial use in London, England. Jack Boss the sole shareholder, started the business in 2012; his son, Andrew, is the controller. BOSS LTD recently won a bid from a large client. To ensure that BOSS LTD can deliver this large order, the new client wants to review the audited financial statements before finalizing the contract. In particular, they have indicated that they are interested in seeing the extent of BOSS LTD revenue. You are an associate articling with the firm of Ron & Harry Chartered Professional Accountants (RH). BOSS LTD has recently engaged RH as the auditor for the company. In prior years, BOSS LTD's financial statements were audited by a local public accounting firm. Emma White, the partner responsible for the file, has already dealt with all client acceptance issues. It is now October 31, 2019. You are meeting with Jennifer, who provides you with the following details. Emma: Here are the draft September 30, 2019, financial statements (Exhibit ). I met with Jack and Andrew last week to discuss the audit, here are my meeting notes, with some general information about BOSS LTD (Exhibit II). I would like you to prepare the audit planning memo for this new client. Please ensure that the overall financial statement risk, materiality determinations, and the preliminary analytical review of the financial statements are included. Your analysis should tie into the key accounts and assertions impacted. You do not have to provide audit procedures based on your analysis, as I will do that myself As inventory is BOSS LTD's largest asset, another associate, Mark, attended the inventory count on September 30. He has documented his observations of the count and the procedures he performed (Exhibit ill). I would like you to develop the follow-up audit procedures we will perform for each key inventory account assertion. As well, I would like you to review Mark's observations of the count and identify the risks and control improvements related to inventory count procedures that we will communicate to the client. Mark has already sent out the accounts receivable and legal confirmations. Here is a summary of the results (Exhibit IV). He did not have time to discuss the results with the client, so you will have to do all of the follow-up work. If you identify any potential adjustments to the financial statements, please prepare them, so I can add them to the summary of identified misstatements. Also, please explain what audit procedures you will perform related to the accounts receivable and legal confirmation results Exhibiti Boss Ltd. Observation of Inventory Count and Count Procedures Performed (Prepared by Mark, associate) . Observation of BOSS LTD's Inventory Count on September 30, 2019 Inventory ranges from inexpensive parts, such as nuts and bolts, to valuable items, such as motors. In addition to raw materials, inventory also includes completed tractors. There is no work in process. A manager, who deals with BOSS LTD's inventory on a daily basis, supervised the count; most of the counters were those office staff available at the time. There weren't any written count procedures, but the manager said he told each count team which area to count, and asked that one member of the team perform the count and that the other member re-count it before writing it down Rather than marking which areas are counted, BOSS LTD uses the pre-numbered count sheets to ensure all inventory is counted. Each count team took a pre-numbered count sheet from the manager, recorded their counts on the count sheet, and then handed it back to the manager. When a difference was found between the count sheet and inventory records, a re-count was performed. In the cases where there was still a difference, the manager considered this an error, and investigated the difference prior to changing the inventory records The counters counted all inventory on the shelves, no matter what condition it was in. I asked Andrew Boss about this, and found that the only time BOSS LTD writes off inventory is when it is taken off the shelves to be used, but is found to be damaged or obsolete. According to Andrew Boss, this does not happen very often. Shipments were received during the count, and one staff person was dedicated to receiving the shipments into the inventory system, and placing those items on the shelves Count Procedures Performed 1. I inspected the inventory for items that looked old or damaged, and found the following: a. Two engines that looked old, as they were dusty b. Three boxes of nuts that were rusty C10 sets of tires that were deflated 2 I performed test counts of the inventory. I selected a sample of 15 from the count sheets and traced them to the physical inventories on the shelf and selected a sample of 15 from the physical inventories on the shelf and traced them to the count sheets. I found one error, in which the count sheet indicated that there were 290 gearboxes, when I counted, I found 250 gearboxes. When I informed the inventory manager of this difference, there was a re- count, and 250 was found to be the correct number. The inventory manager adjusted the amount in the system 3. Tobtained a copy of the final inventory listing and the count sheets Exhibit continued) Boss Lad Comparative Financial Statements As a September 30, 2019 STATEMENT OF RETAINED EARNINGS 2019 2018 (Audied Net income after tax [422012 253.29 Retained earnings, opening 400 279 145.350 Retained earnings, closing E 32221 E 4002 Exhibiti Boss Lad Meeting Minutes (Prepared by Emma White, CPA) Since its inception in 2012, BOSS LTD has had increasing income. Peter is involved in all aspects of the business. He negotiate prices for parts with the suppliers, ensures that manufacturing of the tractors is up to standards, is involved in the hiring of employees, and reviews the financial statements Andrew is a CPA; he joined his father in the business in 2016, when he received his designation. Matthew receives an annual bonus of 3% of net income before tax. This year, Boss gave of this staff a bonus, as they had received no wage increases In the last two years due to the sluggish economy. The total bonus amount paid was 25.000 Jack and Andrew are not concerned about implementing additional controls, as they feel that BOSS LTD's processes are rightforward and employees are trustworthy Boss sold a robotic welder for 3,000, as westly deprecated and was no longer required for building the tractors The financial processes are fairly manuat BOSS LTD anothe-shell accounting package for its OL Wm the current potential growth, Jack and Andrew feel that the Current OL application may no longer meet their needs. Accounts Receivable Confirmation Results: Note - We sent five confirmations to high value accounts, which make up a significant portion of total AR population Amount BOSS LTD AR Sub- ledger Confirmed by Customer Amount (CAD) Customer Customer Response Nas Inc 667800 659,325 Invoice said we received eight tractors, but we received seven Ju Martin C20750 N Emb Grocery Lid 140120 0 We sent the cheque for 40.124 on September 29 2019 Halal Halal Inc (301578 623065 Used a Euros exchange rate of 075527 Pata Shoes We received the goods on October 2, 2019 Ignore PST. GST & HST 1) Prepare an audit planning memo for the audit working paper files and include: Assessment of overall risk at the financial statement level (pervasive risks). Include the risk factor and my associated factors that may decrease the magnitude of risk. Use the attached form to identify the risk the accounts and transaction level assertions that may be affected and your assessment. In your meme, summarize your overall risk assessment and explain your reasoning this refer to entity-level controls covered in Chapter 7) b. Calculate materiality (use the attached form. Identify the users and their needs. Determine an appropriate buse and performance materiality. Summarize your conclusions on materiality in the memo 2) Perform the preliminary walytical procedures based on the di financial statements Caleate gross profit margin (current ratio, armover and inventory over Interpeet your findings and identify any impact on the wodat additional procedures that should be performed ate) 3) Identify at least five control deficiencies in the client's inventory procedures along with implications and recommendations to improve Summarize your findings in a dat memo to the client 4) Identify substantive procedures to gather evidence for valtion existence, completeness, cut-off and rights and obligaties sertions related to the very balance. Chint given the control deficiencies identified what other tests should the editor perform to other sufficient evidence Summae your findings in a separate meme to the audiengement partner 5) Analyze the legal and ecos receivable confirmations and identify proposed adjustments to balances along with my other procedures that should be performed to the deal information related to these this you will partner Leo Lorenzo & Sons Ltd. (LLS) is an owner-managed machinery manufacturer that specializes in producing small electric utility tractors for commercial use in Winnipeg, Manitoba. Leo Lorenzo, the sole shareholder, started the business in 2012; his son, Matthew, is the controller. LLS recently won a bid from a large client. To ensure that LLS can deliver this large order, the new client wants to review the audited financial statements before finalizing the contract. In particular, they have indicated that they are interested in seeing the extent of LLS revenue. You are an associate articling with the firm of Hamilton & Warren, Chartered Professional Accountants (HW). LLS has recently engaged HW as the auditor for the company. In prior years, LLS's financial statements were audited by a local public accounting firm. Jennifer Hamilton, the partner responsible for the file has already dealt with all client acceptance issues. It is now October 31, 2019. You are meeting with Jennifer, who provides you with the following details. Jennifer: Here are the draft September 30, 2019, financial statements (Exhibit 1). I met with Leo and Matthew last week to discuss the audit; here are my meeting notes, with some general information about LLS (Exhibit II). I would like you to prepare the audit planning memo for this new client. Please ensure that the overall financial statement risk, materiality determinations, and the preliminary analytical review of the financial statements are included. Your analysis should tie into the key accounts and assertions impacted. You do not have to provide audit procedures based on your analysis, as I will do that myself. As inventory is LLS's largest asset, another associate, Akari Sato, attended the inventory count on September 30. He has documented his observations of the count and the procedures he performed (Exhibit ill). I would like you to develop the follow-up audit procedures we will perform for each key inventory account assertion. As well, I would like you to review Akari's observations of the count, and identify the risks and control improvements related to inventory count procedures that we will communicate to the client, Akari has already sent out the accounts receivable and legal confirmations. Here is a summary of the results (Exhibit IV). He didn't have time to discuss the results with the client, so you will have to do all of the follow-up work. If you identify any potential adjustments to the financial statements, please prepare them, so I can add them to the summary of identified misstatements. Also, please explain what audit procedures you will perform related to the accounts receivable and legal confirmation results. Boss Lad Comparative Financial Statements As a September 30, 2019 BALANCE SHEET 2018 Dra) Audited E E ASSETS Current assets Cash Short-term investments Accounts receivable Prepaid expenses Inventory 30.930 80.000 47.89 30.000 174.567 13.778 531343 19.03 Property, plant, & equipment 300 755 30189 E 1.126 LIABILITIES AND SHAREHOLDER'S EQUITY Current abs Accounts payable and accus Income taxes payable Current portion of note payable E 236.515 370,990 30.087 20.000 Bank loan Other abilities (Note 1) 155.000 230.000 57 000 7280 Shareholder's quity Retained caringe 100 100 019 Notes: Note 1 - This includes contingent les Exhibit i continued Boss Lad Comparative Financial Statements As a September 30, 2019 STATEMENT OF INCOME 2019 2018 (Audited Revenue Cost of goods sold 3,500,000 1437.900 E 3.115.400 1414 419 Gross profit 2.052.100 1.700.981 25.745 19,878 30.123 34 567 24.000 Expenses Advertising & promotion Amortization Automobile Insurance Interest on notes payable Office & Supplies Professional fees Repairs & maintenance Salaries Travel Units 24.000 20.000 12.54 45.875 1.190.345 8.675 167578 42.345 25,876 123.450 987.543 4.981 124 984 Income before totes Gaidos) on investments Income taxes 445.313 6786 276,130 2.564 24.755 253.929 Net income after tax Leo Lorenzo & Sons Ltd. (LLS) is an owner-managed machinery manufacturer that specializes in producing small electric utility tractors for commercial use in Winnipeg, Manitoba. Leo Lorenzo, the sole shareholder, started the business in 2012; his son, Matthew, is the controller. LLS recently won a bid from a large client. To ensure that LLS can deliver this large order, the new client wants to review the audited financial statements before finalizing the contract. In particular, they have indicated that they are interested in seeing the extent of LLS revenue. You are an associate articling with the firm of Hamilton & Warren, Chartered Professional Accountants (HW). LLS has recently engaged HW as the auditor for the company. In prior years, LLS's financial statements were audited by a local public accounting firm. Jennifer Hamilton, the partner responsible for the file has already dealt with all client acceptance issues. It is now October 31, 2019. You are meeting with Jennifer, who provides you with the following details. Jennifer: Here are the draft September 30, 2019, financial statements (Exhibit 1). I met with Leo and Matthew last week to discuss the audit; here are my meeting notes, with some general information about LLS (Exhibit II). I would like you to prepare the audit planning memo for this new client. Please ensure that the overall financial statement risk, materiality determinations, and the preliminary analytical review of the financial statements are included. Your analysis should tie into the key accounts and assertions impacted. You do not have to provide audit procedures based on your analysis, as I will do that myself. As inventory is LLS's largest asset, another associate, Akari Sato, attended the inventory count on September 30. He has documented his observations of the count and the procedures he performed (Exhibit ill). I would like you to develop the follow-up audit procedures we will perform for each key inventory account assertion. As well, I would like you to review Akari's observations of the count, and identify the risks and control improvements related to inventory count procedures that we will communicate to the client, Akari has already sent out the accounts receivable and legal confirmations. Here is a summary of the results (Exhibit IV). He didn't have time to discuss the results with the client, so you will have to do all of the follow-up work. If you identify any potential adjustments to the financial statements, please prepare them, so I can add them to the summary of identified misstatements. Also, please explain what audit procedures you will perform related to the accounts receivable and legal confirmation results. BOSS LTD is an owner-managed machinery manufacturer that specializes in producing small electric utility tractors for commercial use in London, England. Jack Boss the sole shareholder, started the business in 2012; his son, Andrew, is the controller. BOSS LTD recently won a bid from a large client. To ensure that BOSS LTD can deliver this large order, the new client wants to review the audited financial statements before finalizing the contract. In particular, they have indicated that they are interested in seeing the extent of BOSS LTD revenue. You are an associate articling with the firm of Ron & Harry Chartered Professional Accountants (RH). BOSS LTD has recently engaged RH as the auditor for the company. In prior years, BOSS LTD's financial statements were audited by a local public accounting firm. Emma White, the partner responsible for the file, has already dealt with all client acceptance issues. It is now October 31, 2019. You are meeting with Jennifer, who provides you with the following details. Emma: Here are the draft September 30, 2019, financial statements (Exhibit ). I met with Jack and Andrew last week to discuss the audit, here are my meeting notes, with some general information about BOSS LTD (Exhibit II). I would like you to prepare the audit planning memo for this new client. Please ensure that the overall financial statement risk, materiality determinations, and the preliminary analytical review of the financial statements are included. Your analysis should tie into the key accounts and assertions impacted. You do not have to provide audit procedures based on your analysis, as I will do that myself As inventory is BOSS LTD's largest asset, another associate, Mark, attended the inventory count on September 30. He has documented his observations of the count and the procedures he performed (Exhibit ill). I would like you to develop the follow-up audit procedures we will perform for each key inventory account assertion. As well, I would like you to review Mark's observations of the count and identify the risks and control improvements related to inventory count procedures that we will communicate to the client. Mark has already sent out the accounts receivable and legal confirmations. Here is a summary of the results (Exhibit IV). He did not have time to discuss the results with the client, so you will have to do all of the follow-up work. If you identify any potential adjustments to the financial statements, please prepare them, so I can add them to the summary of identified misstatements. Also, please explain what audit procedures you will perform related to the accounts receivable and legal confirmation results Exhibiti Boss Ltd. Observation of Inventory Count and Count Procedures Performed (Prepared by Mark, associate) . Observation of BOSS LTD's Inventory Count on September 30, 2019 Inventory ranges from inexpensive parts, such as nuts and bolts, to valuable items, such as motors. In addition to raw materials, inventory also includes completed tractors. There is no work in process. A manager, who deals with BOSS LTD's inventory on a daily basis, supervised the count; most of the counters were those office staff available at the time. There weren't any written count procedures, but the manager said he told each count team which area to count, and asked that one member of the team perform the count and that the other member re-count it before writing it down Rather than marking which areas are counted, BOSS LTD uses the pre-numbered count sheets to ensure all inventory is counted. Each count team took a pre-numbered count sheet from the manager, recorded their counts on the count sheet, and then handed it back to the manager. When a difference was found between the count sheet and inventory records, a re-count was performed. In the cases where there was still a difference, the manager considered this an error, and investigated the difference prior to changing the inventory records The counters counted all inventory on the shelves, no matter what condition it was in. I asked Andrew Boss about this, and found that the only time BOSS LTD writes off inventory is when it is taken off the shelves to be used, but is found to be damaged or obsolete. According to Andrew Boss, this does not happen very often. Shipments were received during the count, and one staff person was dedicated to receiving the shipments into the inventory system, and placing those items on the shelves Count Procedures Performed 1. I inspected the inventory for items that looked old or damaged, and found the following: a. Two engines that looked old, as they were dusty b. Three boxes of nuts that were rusty C10 sets of tires that were deflated 2 I performed test counts of the inventory. I selected a sample of 15 from the count sheets and traced them to the physical inventories on the shelf and selected a sample of 15 from the physical inventories on the shelf and traced them to the count sheets. I found one error, in which the count sheet indicated that there were 290 gearboxes, when I counted, I found 250 gearboxes. When I informed the inventory manager of this difference, there was a re- count, and 250 was found to be the correct number. The inventory manager adjusted the amount in the system 3. Tobtained a copy of the final inventory listing and the count sheets Exhibit continued) Boss Lad Comparative Financial Statements As a September 30, 2019 STATEMENT OF RETAINED EARNINGS 2019 2018 (Audied Net income after tax [422012 253.29 Retained earnings, opening 400 279 145.350 Retained earnings, closing E 32221 E 4002 Exhibiti Boss Lad Meeting Minutes (Prepared by Emma White, CPA) Since its inception in 2012, BOSS LTD has had increasing income. Peter is involved in all aspects of the business. He negotiate prices for parts with the suppliers, ensures that manufacturing of the tractors is up to standards, is involved in the hiring of employees, and reviews the financial statements Andrew is a CPA; he joined his father in the business in 2016, when he received his designation. Matthew receives an annual bonus of 3% of net income before tax. This year, Boss gave of this staff a bonus, as they had received no wage increases In the last two years due to the sluggish economy. The total bonus amount paid was 25.000 Jack and Andrew are not concerned about implementing additional controls, as they feel that BOSS LTD's processes are rightforward and employees are trustworthy Boss sold a robotic welder for 3,000, as westly deprecated and was no longer required for building the tractors The financial processes are fairly manuat BOSS LTD anothe-shell accounting package for its OL Wm the current potential growth, Jack and Andrew feel that the Current OL application may no longer meet their needs. Accounts Receivable Confirmation Results: Note - We sent five confirmations to high value accounts, which make up a significant portion of total AR population Amount BOSS LTD AR Sub- ledger Confirmed by Customer Amount (CAD) Customer Customer Response Nas Inc 667800 659,325 Invoice said we received eight tractors, but we received seven Ju Martin C20750 N Emb Grocery Lid 140120 0 We sent the cheque for 40.124 on September 29 2019 Halal Halal Inc (301578 623065 Used a Euros exchange rate of 075527 Pata Shoes We received the goods on October 2, 2019 Ignore PST. GST & HST 1) Prepare an audit planning memo for the audit working paper files and include: Assessment of overall risk at the financial statement level (pervasive risks). Include the risk factor and my associated factors that may decrease the magnitude of risk. Use the attached form to identify the risk the accounts and transaction level assertions that may be affected and your assessment. In your meme, summarize your overall risk assessment and explain your reasoning this refer to entity-level controls covered in Chapter 7) b. Calculate materiality (use the attached form. Identify the users and their needs. Determine an appropriate buse and performance materiality. Summarize your conclusions on materiality in the memo 2) Perform the preliminary walytical procedures based on the di financial statements Caleate gross profit margin (current ratio, armover and inventory over Interpeet your findings and identify any impact on the wodat additional procedures that should be performed ate) 3) Identify at least five control deficiencies in the client's inventory procedures along with implications and recommendations to improve Summarize your findings in a dat memo to the client 4) Identify substantive procedures to gather evidence for valtion existence, completeness, cut-off and rights and obligaties sertions related to the very balance. Chint given the control deficiencies identified what other tests should the editor perform to other sufficient evidence Summae your findings in a separate meme to the audiengement partner 5) Analyze the legal and ecos receivable confirmations and identify proposed adjustments to balances along with my other procedures that should be performed to the deal information related to these this you will partner