Overview Elated Earth Co. (EE) was established 15 years ago by Peter Pepper. EE started when Peter started selling homemade carrot juice that quickly became popular. He expanded the product line into other fruit juices, smoothies, and soups. The company's products are currently made in factories in Quebec and British Columbia. It uses a variety of trucking companies to deliver its products because if products are delivered promptly they will spoil. Its customers include large retailers and specialty coffee houses across Canada and the United States and it is looking to expand into Europe over the next couple of years. The company has a December 31 year end. You are an audit senior at Lea & Co. CPA's and you have been asked to plan the December 31, 2020 year end audit. Lea CPA's have been the auditor of EE for the past 5 years. You are currently reviewing the file documentation relating to EE's purchasing and sales cycles. You note that while EE is currently a private entity, they are considering taking the company public in 2021. Sales Growth During 2020, due to a giobal pandemic, the demand fox pre-packaged products, including fruit drinks and other beverages increased faster than the company could produce. Therefore, in 2020, the company had one of its best years ever with respect to sales and profits, in discussions with the CFO, you learn that he believes some of the company's growth is attributed to an advertising campaign that ran during the year. The ad campaign promoted the benefits of EE's all-natural products to the environment. Peter believes the $1.25M spent on this advertising campaign should be capitalized because a portion of the increase in sales must be a result of the advertising. He expresses satisfaction with the financial performance because he indicates that management bonuses are dependent on net income, and he feels management worked very hard during the pandemic to ensure EE's success. Processes Individuals can order goods directly using EE's website. When an order is placed, for existing customers, the system automatically conducts a credit check. When the credit it verified, the order is sent to the warehouse. For new customers, the order is sent to the sales team, who performs the credit check and sets the credit limits before orders are accepted. EE's website is not integrated with the inventory system and therefore, inventory levels are not checked when orders are placed. After the credit check, the sales staft enter new customer orders into the system and send the order to the warehouse. When the order is entered into the system, it is assigned a sequential number. The warehouse staff print each order and get it ready to ship out. When the order is ready, a shipping document is prepared and the shipping company is advised that the order is ready for pick up. When the shipping company picks up the goods, it takes a copy of the shipping document to give to the customer. A copy of the shipping document is also sent to accounting. Due to the pandemic, there were staffing reductions in the accounts payable department. Due to the reduction in the accounting staff, supplier statement reconciliations were not performed during the last quarter of the year. Additionally, during this time, changes to the supplier master file were performed by the accounts payable clerks as well as the supervisors, to reduce a work backlog. The accounts payable clerk is primarily responsible for matching the customer order, the shipping document and the invoice that was sent to the warehouse. When the documents are matched, the accounts payable clerks will send an email to the controller confirming the match and requesting that the on-line payment be processed. in the past six months Elated Earth has updated its manufacturing processes and purchased new equipment. As a result, at year end there was equipment no longer in use while Elated Earth worked to find a buyer for the replaced equipment. Purchase requisitions for the new equipment were approved by the production supervisors but to date they have been too busy to do much to find a buyer for the old equipment. 2019 2020 2020 2019 Sales $26,508,000 Gross Margin $22,386,700 15,321,000 17,981,000 Net Income before Tax 6,466,000 4,317,500 Total Assets 29,968,000 29,375,000 Required: la) identity 5 risk factors and explain how the item impact the risk of material misstatement for Elated Earth. (5 Marks) b) inherent risk is high and the control risk is high, what type of audit should be performed? (1 maries) (h) As the external auditor of Elated Earth Co, identify and explain SEVEN deficiencies in the sales and payables system and recommend a control to address each of these deficiencies (14 marks) (c) Assess planning and performance materiality (5 Marks) (d) List five procedures the auditor should perform to provide sufficient and appropriate evidence over EE's Property, plant and equipment. (5 marks) Question 2 (a) With respect to the group project you conducted at the end of the course, what were the top three risks for the entity you were assigned? (3Marks) (b) What type of audit was recommended and why? (2 Marks) Overview Elated Earth Co. (EE) was established 15 years ago by Peter Pepper. EE started when Peter started selling homemade carrot juice that quickly became popular. He expanded the product line into other fruit juices, smoothies, and soups. The company's products are currently made in factories in Quebec and British Columbia. It uses a variety of trucking companies to deliver its products because if products are delivered promptly they will spoil. Its customers include large retailers and specialty coffee houses across Canada and the United States and it is looking to expand into Europe over the next couple of years. The company has a December 31 year end. You are an audit senior at Lea & Co. CPA's and you have been asked to plan the December 31, 2020 year end audit. Lea CPA's have been the auditor of EE for the past 5 years. You are currently reviewing the file documentation relating to EE's purchasing and sales cycles. You note that while EE is currently a private entity, they are considering taking the company public in 2021. Sales Growth During 2020, due to a giobal pandemic, the demand fox pre-packaged products, including fruit drinks and other beverages increased faster than the company could produce. Therefore, in 2020, the company had one of its best years ever with respect to sales and profits, in discussions with the CFO, you learn that he believes some of the company's growth is attributed to an advertising campaign that ran during the year. The ad campaign promoted the benefits of EE's all-natural products to the environment. Peter believes the $1.25M spent on this advertising campaign should be capitalized because a portion of the increase in sales must be a result of the advertising. He expresses satisfaction with the financial performance because he indicates that management bonuses are dependent on net income, and he feels management worked very hard during the pandemic to ensure EE's success. Processes Individuals can order goods directly using EE's website. When an order is placed, for existing customers, the system automatically conducts a credit check. When the credit it verified, the order is sent to the warehouse. For new customers, the order is sent to the sales team, who performs the credit check and sets the credit limits before orders are accepted. EE's website is not integrated with the inventory system and therefore, inventory levels are not checked when orders are placed. After the credit check, the sales staft enter new customer orders into the system and send the order to the warehouse. When the order is entered into the system, it is assigned a sequential number. The warehouse staff print each order and get it ready to ship out. When the order is ready, a shipping document is prepared and the shipping company is advised that the order is ready for pick up. When the shipping company picks up the goods, it takes a copy of the shipping document to give to the customer. A copy of the shipping document is also sent to accounting. Due to the pandemic, there were staffing reductions in the accounts payable department. Due to the reduction in the accounting staff, supplier statement reconciliations were not performed during the last quarter of the year. Additionally, during this time, changes to the supplier master file were performed by the accounts payable clerks as well as the supervisors, to reduce a work backlog. The accounts payable clerk is primarily responsible for matching the customer order, the shipping document and the invoice that was sent to the warehouse. When the documents are matched, the accounts payable clerks will send an email to the controller confirming the match and requesting that the on-line payment be processed. in the past six months Elated Earth has updated its manufacturing processes and purchased new equipment. As a result, at year end there was equipment no longer in use while Elated Earth worked to find a buyer for the replaced equipment. Purchase requisitions for the new equipment were approved by the production supervisors but to date they have been too busy to do much to find a buyer for the old equipment. 2019 2020 2020 2019 Sales $26,508,000 Gross Margin $22,386,700 15,321,000 17,981,000 Net Income before Tax 6,466,000 4,317,500 Total Assets 29,968,000 29,375,000 Required: la) identity 5 risk factors and explain how the item impact the risk of material misstatement for Elated Earth. (5 Marks) b) inherent risk is high and the control risk is high, what type of audit should be performed? (1 maries) (h) As the external auditor of Elated Earth Co, identify and explain SEVEN deficiencies in the sales and payables system and recommend a control to address each of these deficiencies (14 marks) (c) Assess planning and performance materiality (5 Marks) (d) List five procedures the auditor should perform to provide sufficient and appropriate evidence over EE's Property, plant and equipment. (5 marks) Question 2 (a) With respect to the group project you conducted at the end of the course, what were the top three risks for the entity you were assigned? (3Marks) (b) What type of audit was recommended and why? (2 Marks)