Ontario Fun Space (OFS) is a privately owned entertainment complex consisting of a theme park, concert venue, and marina in Lions Head, Ontario. OFS was founded in 1988 by a group of 10 local investors who thought a theme park would be a great way to attract visitors to the area and boost the local economy.

Over the years, OFS has developed a solid reputation as a fun place for families, boating enthusiasts, and concertgoers. However, as its facilities aged, the investors decided it was necessary to seek additional funds. In 2015, the investors sold 80 percent of OFS to FFI, a large American amusement park company. The investors no longer have any active involvement with OFS and receive a dividend based upon net income. FFI is known to have high expectations for return on its investment. To motivate OFS management to run a highly profitable operation, FFI implemented a bonus plan based upon net income. Also, to maintain firm oversight of its investment, FFI required OFS to send it the following monthly operational reports: expenditure to budget, sales, and the list of boats docked in the marina.

In 2015, OFS decided to add a 190-foot observation wheel that would give riders in climate-controlled cars a panoramic view of the beautiful beaches. Because of its potential to attract tourists to the area, OFS was able to obtain a forgivable loan from the Ontario government. One of the conditions of the loan is that OFS must maintain certain levels of employment for 10 years. If OFS does not meet those requirements anytime within that 10-year period, it must repay the entire loan. Per ASPE (Accounting Standards for Private Enterprises) 3800, the loan has been recorded as a credit and is being amortized over the same period of the estimated life of the observation wheel. OFS must supply the Ontario government with an annual employment report as well as audited financial statements.

In 2012, when OFS completed the construction of its concert venue, it signed a 20-year lease agreement with the concert promoter Merek Neal (MN). According to the agreement, MN will promote and operate the OFSs concert venue, and give OFS 20 percent of all box office and concessionary sales revenue.

You are a newly hired senior auditor at Bruce Penn LLP, a mid-size accounting firm located in the Lions Head area. This is your firms fourth year performing OFSs financial statements audit. You are in charge of the audit for the year ended March 31, 2020. It is now May 2020.

Here are highlights from the OFS engagement team meeting:

New POS System: Prior to the 2019 theme park season, OFS purchased and implemented a brand new point-of-sale (POS) system. Due to delays with the supplier, OFS was unable to procure the new system until late March 2019. As a result, the POS installation was completed just a day before the theme parks opening day. There was no time to perform any system tests, such as to verify the compatibility between the POS and OFSs accounting system, or to properly train employees. With no time to prepare, OFS cashiers and management were forced to learn the new POS system on the fly.

There was also no time to install the new system throughout the entertainment complex, and the marina was left without any sales terminals. The old terminals had all been discarded. Thus, marina docking fees could be paid in cash only. Tony is the marinas only employee and has been with OFS since its inception. Although Tony doesnt own a boat, he is an avid sailor who is very much liked and trusted by all marina customers. Each customer must sign a formal agreement, listing the customers name, the boats name and dimensions, and the annual docking fee is based on an OFS pricing chart.

Overview of Revenue: In 2020, OFS experienced a considerable drop in revenue, which was attributed to an unusually cool and wet summer and a significant decline in American tourists who usually visit the area. In a typical year, the breakdown of OFS revenues is 70 percent of revenue is generated from the theme park, 20 percent from Merek Neal, and 10 percent from the marina.

Below is a summary of total revenue and net income:

Total Annual RevenueYearRevenueNet Income2020 (unaudited)$10,000,000$450,0002019 (audited)13,000,000400,0002018 (audited)13,800,000475,0002017 (audited)13,600,000450,0002016 (audited)13,700,000480,000

Annual Marina RevenueYearRevenue2020 (unaudited)$134,0502019 (audited)152,0002018 (audited)152,5002017 (audited)153,0002016 (audited)152,350

Property, Plant, And Equipment: Below is an excerpt of the property, plant, and equipment continuity schedule that was provided by OFS accounting clerk.

Asset Class

Opening

Balance

March 2019

2020 Capital Asset Additions

2020 Amortization

Expense

Ending Balance March 2020Amortization RateBuilding$8,250,000$ Nil$275,000$7,975,00040 yearsTheme park rides1,750,000Nil350,0001,400,00020 yearsTheme park slides750,000Nil150,000600,00020 yearsObservation wheel1,275,000Nil85,0001,190,00020 yearsOther200,000750,000 (Note 1)52,500897,500VariousTotal Property Plant, and Equipment$12,225,000$750,000$912,500$12,062,500

Note 1: Per managements request, other additions consist of the following:

$150K for bird food (amortized over 10 years, the average lifespan of the Canada Goose, which is a big attraction for kids attending the theme park). $150K for promotional material with OFS logo (T-shirts, banners, tents, stickers, and pins). Amortized over five years. $200K for point of sale system. Amortized over 10 years. $250K for other capital asset items. Management to provide support and explanation.

Restructuring and Potential Sale of OFS: In early August 2019, a rumour leaked to the press that due to problems with its U.S. operations, FFI was no longer interested in operating in Canada. As a result, it was shutting down operations and terminating all staff. At the end of the theme parks season, in late October, FFI publicly announced that it was significantly downsizing and restructuring OFSs operations.

Coinciding with the August rumour, a two-week termination of employment notice was issued to all OFS staff and management, with the exception of Tony, two accounting managers, and two accounting clerks, who were meant to assist with the financial statement audit. The managers and clerks were informed that their employment would end at the audits completion, expected in June 2020. Both accounting managers are using their vacation days prior to their termination date. They are available to answer questions related to the audit on Tuesdays and Thursdays, the only days they are at work.

OFS management had intended to perform reconciliation on the OFS systems theme park sales data and bank statements (including monthly credit card reports), but these plans were also put on hold once the termination notices were issued. Also in August 2019, OFS management did not enforce the mandatory reporting and FFI stopped receiving its monthly OFS reporting package.

As part of the managements termination agreement, FFI will pay out 50 percent of net income from OFSs 2020 operations as a severance payment. The amount will be divided and paid to all terminated managers following the audit, at which time FFI intends to bring in its own staff from the United States to temporarily take over OFS operations. FFI plans to finalize its decision about OFSs future over the next six months. Several resort developers are interested in purchasing the property and have approached FFI. FFI is considering two options:

1. Dispose of theme park property, plant, and equipment individually and sell theme park land to one of the resort developers. OFS would continue operating the observation wheel, marina, and concert venue.

2. Sell the entire OFS operationthe theme park, observation wheel, marina, and concert venueto one of the resort developers.

Merek Neal Lawsuit: On February 28, 2020, MN responded to the FFIs decision to shut down park operations by launching a $450K lawsuit against OFS and FFI, accusing the two parties of breaching the lease agreement and for the loss of potential revenue from concert tickets and concessionary sales. One of the OFS accounting managers believes that MN is just bluffing and that once FFI decides about OFSs future, the lawsuit will be withdrawn.

REQUIRED

a. Assess overall financial statement level risk.

b. Recommend overall materiality (planning materiality). Be sure to use both quantitative and qualitative analysis as support. Recommend performance materiality for the OFS engagement. Provide support for your recommendation.

c. Identify significant financial reporting risks and explain which key accounts are affected. For each account perform the following:

i. Assess inherent risk (risk of material misstatement prior to consideration of controls). Provide an explanation for your risk assessment and, where applicable, provide support with preliminary analytical review.

ii. Assess control risk and provide an explanation for your risk assessment.

iii. Based upon your assessment of risk of material misstatement, explain the potential misstatement (i.e., over or understatement) for each identified account and what are the relevant assertion(s).

d. Based upon your risk assessment for each account, explain what type of audit approach would be most appropriate for that account/cycle.