Odisha Ltd. (Odisha) is a private company based in Charlottetown, P.E.I., which commenced operations in October of 20X0. After three months of losses, it quickly began turning a profit. Most of Odisha’s business comes from a matchmaking service for clients who are seeking a long-term romantic relationship, while the rest of the business caters to newcomers to Charlottetown looking to build friendships and social networks. It is now September 25, 20X1, and you, CPA, have just met with Sukhbir Wall, a partner at Brick and Wall Chartered Professional Accountants (B&W). Sukhbir tells you that the firm has recently accepted Odisha as a new audit client and that you will be the senior on the engagement. Odisha’s bank has insisted that an audit be performed and that the financial statements be prepared using accounting standards for private enterprises (ASPE). There are no specific covenants on the bank loan, but the bank manager noted that she “will be monitoring the profitability of this start-up business very closely.” Odisha has a September 30 year end. Sukhbir explained that she met with Randeep Ranch, president and sole shareholder of Odisha, earlier today. She took detailed notes during the meeting as Randeep gave her an overview of recent events at Odisha and described how Odisha has accounted for various items (see appendix). Sukhbir has asked you to discuss any accounting issues that you identify and provide valid audit procedures addressing each of the significant accounting issues and the risks they pose. You do not need to complete an audit planning memo for now. Your response, not including any Excel worksheets (if applicable), should not exceed 1,800 words.

Appendix Notes from meeting with Randeep Ranch

Matchmaking revenue

Randeep is excited about the revenues that Odisha generated during its first year of business. The main revenue source is a matchmaking service for clients seeking a romantic relationship. New clients sign a contract and pay an up-front fee of $1,200, which is deferred and recorded evenly over 12 months. The fee is payable upon initial consultation, at which time Odisha helps the client create a personal profile and record a video for potential dates to view. Clients have regular contact with Odisha staff to view videos of potential matches and discuss their progress over a 12-month period. At the end of the year, if clients have still not found a match, they can request a refund of 25% of their fee. If they find a match before the 12 months is up and leave the program, they do not receive a refund. However, they may return within the 12-month period if the relationship ends. Client sign-ups for the matchmaking service began in January of 20X1 and have occurred evenly since, with 400 customers enrolled. So far, 150 of the customers have entered a long-term relationship and have happily left the program. Socialize in Charlottetown Series

Odisha co-ordinates regular events such as dinner parties, sporting events, ski trips, and wine tastings. Odisha is responsible for identifying events that are of interest to clients, securing spaces at the events, and then promoting the events to its clients. Venues will often put on events specifically to meet Odisha’s needs if a minimum number of clients can be guaranteed. Clients pay the fees in advance to Odisha and attend as part of the group. For example, a recent wine tasting cost $100 per person and Odisha charged its customers $125 per person to attend. Odisha booked an expense of $100 for each client for the fee paid to the venue and recorded $125 in revenue for the amount collected from participants (fee + Odisha’s standard 25% markup). Some of the clients at the winetasting were unhappy with the quality of the wines and complained. Fortunately, the venue provided them with a coupon for a future visit as a gesture of goodwill. Odisha is not responsible for addressing customer concerns related to the venues selected. During 20X1, Odisha has recorded $23,000 in revenue and $18,400 in expenses related to the Socialize in Charlottetown Series.

Capital assets - Leases

In June 20X1, Odisha leased a truck for four years at 0% interest, for a monthly payment of $792. If Randeep is happy with the truck’s performance, he will consider purchasing the truck at the end of the lease for the buyout amount of $40,000, as he would expect it to meet his needs for at least 10 years. The $40,000 is representative of what the fair value of the truck is expected to be at that time. Lease payments have been expensed in the financial statements. If the truck had been purchased for cash, the price would have been $65,000.

Dinner for Eight Ltd.

In January 20X1, Odisha invested in a business called Dinner for Eight Ltd. (DFEL) which had been started by Gagan Singh, a local restaurant owner. DFEL holds weekly dinners where eight clients are brought together for a meal at Gagan’s restaurant. Randeep wanted to invest in the business as he sees it as a good opportunity to bring together clients from Odisha. Gagan invested $8,500 in initial capital to start the business. Odisha subsequently invested $1,500 and holds a 15% ownership interest, while Gagan now holds the remaining 85%. Randeep was pleased that he had the business sense to make sure a contract was drawn up by a lawyer, ensuring that the terms of this business relationship were clearly defined. Randeep is a board member of DFEL and plans to become more involved in the business than he has been so far. Gagan told him that he appreciates Randeep’s increased involvement in decision-making because Randeep truly understands the group dynamics. Randeep has recorded his $1,500 investment as an “other asset” for now because he is not sure what to do with it. He has not recorded any other amounts in Odisha’s accounts relating to DFEL. Gagan has been doing the billing and payment of expenses relating to the dinner parties. For 20X1, DFEL earned profits of $25,000 and did not pay any dividends.