Nukum buys speakers, parts, and related equipment and resells them at a mark-up to a loyal base of customers. Competition is growing, but the market is favourable, and Nukum offers excellent customer service, giving it a competitive advantage. The owner is very involved in most of the important operating decisions. His capable assistant steps in when necessary. The owner plans to implement a code of ethics at some point and also wishes to improve certain controls. Nukum is a medium-sized private company that operates multiple warehouses, each carrying a mix of inventory items. The first type of inventory, which can be quite costly consists of specialized speaker and basses. The turnover rate for this inventory is high since new technology is always emerging. Because the company orders months in advance, Nukum occasionally overestimates demand. After three or four months, products are difficult to sell, but they are kept because most cannot be returned to the supplier, and Nukum is reluctant to hold liquidation sales for fear they would negatively affect the sales at regular prices. The second type of inventory, primarily parts, generates a significant portion of Nukum's sales. This category includes items such as wiring, mounts, and covers. The third type of inventory includes amps ranging from sophisticated to generic. This inventory can be returned to suppliers if unsold after a certain period. This year, Nukum implemented an integrated computer system to manage the general ledger as well as inventory, purchases, and sales. Sales representatives enter orders into the sales database, and can modify the information, including quantities and selling prices. Any changes are usually made to orders before shipping. Problems result if representatives make changes after shipping, since they should issue credits instead. The timing differences create reconciliation problems for both customers and Nukum when settling invoices. Also, sometimes credits have been issued in error. For example, the owner described one example where a credit was issued for a price adjustment made by a sales representative. The supporting paperwork stated that the credit had been issued in error (which seems to happen often) and the refund cheque was cancelled. However, the details of the refund cheque could not be located. When asked, the clerk said he left the cheque coples on his desk and the next morning they were gone. He gave up looking for them. Electronic purchase orders require authorization from either the owner or his assistant through the use of a personal identification number (PIN). Each user has a specific PIN. Orders greater than $5,000 require the owner's authorization Occasionally, the owner is not available. He has given one of the accounting clerks he trusts his PIN to be used for emergency situations. Before making a payment, the accounting department matches the invoice to the authorized purchase order and the receiving slip. Other Information The owner noted that Nukum's costs seem higher than expected, particularly since this year he decided to pay suppliers faster in order to benefit from discounts. According to his calculation, the cost of goods sold should have decreased by around 2% over last year, since most suppliers offer discounts and did not increase prices. Instead, he noted a 3% increase in costs. The sales mix has not changed significantly from previous years. Purchases increased and were distributed across the inventory types in amounts similar to the overall sales mix. To help retain the sales team, stock options were given this year for the first time as an added form of compensation. The options are available of Nukum's net income after tax is at least $5 million per year. Customers have 30 days to pay invoices, but most take advantage of a 2% discount offered for payment within 10 days. Customers make payments in full payments and discounts are reimbursed later by system-generated cheques. Cheques may be issued with or without supporting documentation, The company has an operating loan outstanding and a mortgage with a large national bank. The operating loan is secured by 50% of the inventory balance and 75% of accounts receivable under 90 days. The mortgage is secured over select property and plant owned by Nukum. In addition to the bank, there are several minority Shareholders, one of which has expressed an interest in selling her shares to one of the other minority shareholders. The owner noted he just received a memo from a clerk at one of the warehouses. It says the amount of damaged Inventory has been gradually increasing over the past eight months. The clerk suggests this is because the forklift is not operating properly and items are being dropped as they are loaded for shipment. He wants the forklift replaced. He asks what he should do with the damaged inventory that has been piing up in a corner of the warehouse. He suggests holding a liquidation sale to get rid of it, Select Financial Statement information (in thousands): Balance Sheet Income Statement Accounts receivable: $800 Total Revenue: $12,000 Inventory: 1250 Gross Profit: 6,500 Total current assets: 2,560 Interest Expense: 450 Total Assets: $5,970 Income Taxes: 200 Accounts Payable: $325 Net Income after tax: $1,250 Operating Loan: 625 Mortgage Payable: 3,000 Total Liabilities: 4,250 Total Shareholders' Equity: $1,720 Required: (a) Provide a full materiality assessment and conclude on a final materiality level. (8 marks) (b) identity TWO control weaknesses at Nukum. For each weakness, indicate the implication and make a specific recommendation how Nukum can fix it. (ie. Apply the WIR approach). (6 marks) "Only the first 2 weaknesses you provide will be markede 9- % 93 PA Part A - Materiality Assessment: Part B - Control Weaknesses Nukum buys speakers, parts, and related equipment and resells them at a mark-up to a loyal base of customers. Competition is growing, but the market is favourable, and Nukum offers excellent customer service, giving it a competitive advantage. The owner is very involved in most of the important operating decisions. His capable assistant steps in when necessary. The owner plans to implement a code of ethics at some point and also wishes to improve certain controls. Nukum is a medium-sized private company that operates multiple warehouses, each carrying a mix of inventory items. The first type of inventory, which can be quite costly consists of specialized speaker and basses. The turnover rate for this inventory is high since new technology is always emerging. Because the company orders months in advance, Nukum occasionally overestimates demand. After three or four months, products are difficult to sell, but they are kept because most cannot be returned to the supplier, and Nukum is reluctant to hold liquidation sales for fear they would negatively affect the sales at regular prices. The second type of inventory, primarily parts, generates a significant portion of Nukum's sales. This category includes items such as wiring, mounts, and covers. The third type of inventory includes amps ranging from sophisticated to generic. This inventory can be returned to suppliers if unsold after a certain period. This year, Nukum implemented an integrated computer system to manage the general ledger as well as inventory, purchases, and sales. Sales representatives enter orders into the sales database, and can modify the information, including quantities and selling prices. Any changes are usually made to orders before shipping. Problems result if representatives make changes after shipping, since they should issue credits instead. The timing differences create reconciliation problems for both customers and Nukum when settling invoices. Also, sometimes credits have been issued in error. For example, the owner described one example where a credit was issued for a price adjustment made by a sales representative. The supporting paperwork stated that the credit had been issued in error (which seems to happen often) and the refund cheque was cancelled. However, the details of the refund cheque could not be located. When asked, the clerk said he left the cheque coples on his desk and the next morning they were gone. He gave up looking for them. Electronic purchase orders require authorization from either the owner or his assistant through the use of a personal identification number (PIN). Each user has a specific PIN. Orders greater than $5,000 require the owner's authorization Occasionally, the owner is not available. He has given one of the accounting clerks he trusts his PIN to be used for emergency situations. Before making a payment, the accounting department matches the invoice to the authorized purchase order and the receiving slip. Other Information The owner noted that Nukum's costs seem higher than expected, particularly since this year he decided to pay suppliers faster in order to benefit from discounts. According to his calculation, the cost of goods sold should have decreased by around 2% over last year, since most suppliers offer discounts and did not increase prices. Instead, he noted a 3% increase in costs. The sales mix has not changed significantly from previous years. Purchases increased and were distributed across the inventory types in amounts similar to the overall sales mix. To help retain the sales team, stock options were given this year for the first time as an added form of compensation. The options are available of Nukum's net income after tax is at least $5 million per year. Customers have 30 days to pay invoices, but most take advantage of a 2% discount offered for payment within 10 days. Customers make payments in full payments and discounts are reimbursed later by system-generated cheques. Cheques may be issued with or without supporting documentation, The company has an operating loan outstanding and a mortgage with a large national bank. The operating loan is secured by 50% of the inventory balance and 75% of accounts receivable under 90 days. The mortgage is secured over select property and plant owned by Nukum. In addition to the bank, there are several minority Shareholders, one of which has expressed an interest in selling her shares to one of the other minority shareholders. The owner noted he just received a memo from a clerk at one of the warehouses. It says the amount of damaged Inventory has been gradually increasing over the past eight months. The clerk suggests this is because the forklift is not operating properly and items are being dropped as they are loaded for shipment. He wants the forklift replaced. He asks what he should do with the damaged inventory that has been piing up in a corner of the warehouse. He suggests holding a liquidation sale to get rid of it, Select Financial Statement information (in thousands): Balance Sheet Income Statement Accounts receivable: $800 Total Revenue: $12,000 Inventory: 1250 Gross Profit: 6,500 Total current assets: 2,560 Interest Expense: 450 Total Assets: $5,970 Income Taxes: 200 Accounts Payable: $325 Net Income after tax: $1,250 Operating Loan: 625 Mortgage Payable: 3,000 Total Liabilities: 4,250 Total Shareholders' Equity: $1,720 Required: (a) Provide a full materiality assessment and conclude on a final materiality level. (8 marks) (b) identity TWO control weaknesses at Nukum. For each weakness, indicate the implication and make a specific recommendation how Nukum can fix it. (ie. Apply the WIR approach). (6 marks) "Only the first 2 weaknesses you provide will be markede 9- % 93 PA Part A - Materiality Assessment: Part B - Control Weaknesses