Muskoka Brick Muskoka Brick (MB) was established and incorporated in 2017 by Bruce Waiters and has year-end of December 315t. Bruce was born in the Muskoka region and after completing his University degree in History, he decided to return to the area to setup his own business. After months of research, Bruce decided to open his business opposite the Gravenhurst waterfront. Given the significant growth in the area, Bruce decided to open up a manufacturing plant specializing in building materials; specifically brick. With grants from the government, Bruce constructed a 20,000 square foot manufacturing facility capable of producing several different types of bricks for residential and commercial buildings. Revenues have slowly increased since MB was established in 2017. In 2017, revenues amounted to $1,200,000. As of November 2022, revenues are currently at $8,850,000. Bruce has dealt with the growth as best as he can. He hired a fulltime accountant in 2018 and as of the year ended December 31,2021 he had five other employees that work in the administrative area. Their duties include purchasing, payables, payroll, collections (accounts receivables) and sales. This year, Bruce has decided to expand his operations and went to his bank to obtain money for it. The bank agreed to provide funding for a 2,000 square foot expansion subject to a year end audit of the financial information. The bank is concerned with MIC's ability to repay the loans and will be looking at the revenues and net income very carefully. You are the audit senior in charge of the year end audit of ME. ME has never been audited before, although your firm has compiled their financial statements and prepared their corporate tax returns for the past two years. Your audit manager and partner have taken care of the initial engagement procedures. You have been asked to focus on an audit strategy for the sales and accounts receivable section of the audit. Your partner would like you to prepare a memo to her that discusses your assessment of the cycle and your recommended audit strategy. Excerpts from discussions with MB staff and some financial statement extracts are in Exhibit #1 and #2 Requked Prepare the memo Discussions with Staff The accountant mentioned that the record keeping seems to be back to normal the last few months. When asked what he meant, the explained that a new computer system was installed in May, 2022. "Getting the information into the new system was a pain, but with all five of us taking turns entering the data, we finally managed to get it going around July.\" Sales and collection information for the month of June and July was done manually until the computer system was fully operational. The accounts receivable ledger showed that the 2022 balance was made up of approximately 200 clients. Five clients amounted to $3,450,000 in accounts receivable with the other 195 clients accounting for the balance of MR on a fairly even basis. The accountant mentioned that one of the largest client's was relatively new to the area. They had been a significant customer the past year and had been fairly quick with payment. Their account has been rising lately as their focus has been working on a court issue and dealing with the pandemic. One of their largest developments was recently halted pending an investigation into why a pond in the area was backing up on to neighboring residential properties. 95% of all sales come through the sales manager. The other 5% of sales are walk-in customers who need small amounts of product. The accounts receivable clerk or the receptionist will generally deal with these sales. For the larger customers, the sales manager fills out a blank, unnumbered order request. This three-part order request is then approved by Bruce prior to it being put into the system. One copy of the order goes to production, one copy to accounts receivable and one copy is filed in the sales department. Once the material has been sent to the customer, the production department fills out a shipping notice. The notice notes what was sent and is signed by the production manager. A copy of this report is sent to the sales department and to accounts receivable. The sales department then prepares an invoice. Invoices are mailed weekly. One copy remains in the sales department and the third copy goes to accounts receivable. The accounts receivable clerk files all documents until an invoice is received. Once an invoice is received, the clerk pulls out the order request and shipping notice and staples all three documents together. The clerk then searches for the client name in the database. If the client exists into the database, the clerk fills out the invoice information. If the client does not exist, the clerk creates a new file in the database with the client information. Most large customers will pay by cheque on invoice. Smaller customers (about 10% of the sales) will pay with cash. The accounts receivable clerk accepts the cash, applies the cash and cheques to the customer A/R balance and performs the bank reconciliation monthly. The bank reconciliation is reviewed by the accountant, and he signs that he has examined it. Any returns and processed by the accounts receivable clerk and a credit note (paper) is issued. The MR reverses the sale and MR and files the credit memo. No one at MB reviews credit memos. Financial Statement Extracts 2022 Balance (to November 2021 Balance 2022) $320,000 5625.000 Accounts Receivable $3,655,348 $986,000 Allowance for Doubtful $50,000 $50,000 Accounts 53,350,000 553250.000 $1,770,000 $1,650.000