Lily White Flowers Corp.(25 marks)

Lily White Flowers Corp ("LWF") is a private company that provides online florist services. It is looking to go public this year. It has been audited in the past by Alfredo and Moreno, LLP. LWF has decided to go with your firm, Hodge Podge LLP for this year's financial statement audit in hopes of getting lower fees. The Chief Financial Officer, Madeline Wong, is also a close friend of the Managing Partner at Hodge Podge, LLP and hopes that her relationship with the Partner will not affect the audit opinion.

LWF owns six major warehouses that it uses to receive, distribute and store its flowers and plants in Ontario. The money that it receives from the IPO will be used in strategic acquisitions to expand its business to Quebec.

LWF implemented a new inventory system on November 1, 2016.The new system was implemented at LWF quickly and ran in parallel with the old system for about 3 weeks.Conversion testing was done by agreeing the ending balance of inventory dollars in the old system to the beginning inventory dollars in the new system.

Inventory is ordered using manual pre-numbered purchase order ("PO") forms.The PO's are prepared by the Buyers and signed by the Purchasing Manager and then scanned and emailed electronically to the various suppliers.The PO's are then entered into the inventory system stating the PO number, the type of flowers or plants and the quantity ordered.The inventory system will automatically calculate the average cost of the inventory item.The inventory system will flag any gaps in PO number sequences.PO's that are older than 60 days will be automatically canceled by the system if the order is not filled by the vendor.

The suppliers will ship the product along with a packing slip quoting the PO number.Receiving staff at the warehouse will open the shipments and verify the shipment for condition, quantity and type of flowers or plants.The Receivers will pull up the PO in the inventory system and confirm that the items received are all shipped complete in quantity.

When sales orders are received from customers, the inventory system will then generate a sales order form with the customer's sales order number, quantity and type of flowers or plants to be shipped.Shippers will take the sales order and collect the flowers or plants from the storage area, box them along with a copy of the sales order and load them on the dock for shipping.Once the order is filled, the shipper will update the sales order information in the inventory system to deduct the shipped inventory item from the system.

Monthly invoices are sent by the supplier to LWF quoting the PO numbers and the amount charged.The Payables Clerk will check the monthly invoices against the inventory system to ensure that the amounts billed by the vendors have been received in the system.

Inventory counts are performed monthly and any inventory adjustments are approved by the Finance Manager.Inventory is reconciled monthly by the Analyst and approved by the Controller.

Required:

Use the Case Facts above to outline the answers for the following. Any answer with no application to the case will be awarded zero marks

A) What procedures should be performed by Hodge Podge, LLP before taking on this new client?(3 marks)

B) Describe five (5) detailed substantive audit procedures you would perform to verify the year-end inventory balance and the related specific audit assertion.Use the table below.(10 marks)

Substantive audit procedure(1 mark) Specific audit assertion(1 mark)

C) Using the audit risk model, assess all the risks from the audit risk model individually for this audit engagement. Provide support for your assessment of each component of the audit risk model.(12 marks, 3 marks for each component of the audit risk model)