OVWAP Accounting Audit Case

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Case Overview: Assume you are an audit senior employed by an international public accounting firm. On May 1, 2016, Ms. Smith, a partner in the firm, invites you to her office to discuss a special engagement that you will be supervising. To ensure the engagement runs smoothly, she has asked you to summarize in a written planning memorandum--all important risks and factors to be considered when conducting the engagement. The client for the special engagement is Orange Valley Wild Animal Park (OVWAP), a privately held company that operates a safari-style wildlife park in Orange Valley, located in the U.S. Until late last year, OVWAP had been owned and managed by Mr. Jones, founder and chief executive officer (CEO). Upon Mr. Jones' death in 2015, all shares in the company were distributed to his family. Because no one in Jones' family wants to take over the business, the family will sell 100 percent of the OVWAP shares at the end of the current fiscal year to Newman, the current controller and chief financial officer (CFO) of OVWAP. Because OVWAP is a private company, a market price for the shares is not readily available. Instead, the purchase/sale price will be based on a multiple of the income earned from "ongoing operations" in the year ended May 31, 2016, calculated using U.S. GAAP. To ensure OVWAP's reported net income is appropriate, the Jones family has engaged your firm to provide assurance that the year-end financial statements are reliable and are representative of ongoing operations. In past years, OVWAP's financial statements always have been prepared by the CFO without audit or review. Similar to wildlife safari parks in Africa, visitors drive through OVWAP's 3,200-acre park, which is home to over 100 species of native animals, birds and fish. Although hunting is not allowed in the park, fishing is permitted from man-made lakes that OVWAP constructed and began stocking with fish two years ago. The OVWAP park has become a popular year-round tourist attraction, with the number of vehicle admissions increasing from 40,000 in 2005 when the park opened to over 55,000 in the 2015 fiscal year. Most of OVWAP's revenues are earned through park admission and hotel PAGE 1 OF 6 ORANGE VALLEY WILD ANIMAL PARK CASE ACCY 415 - AUDITING SPRING 2018 accommodation fees. Each vehicle admitted to the park is charged a $20 entrance fee and approximately one-third of all park visitors stay in OVWAP's 85-room hotel. With an average nightly rate of $110, hotel occupancy rates typically average 60 percent each year. Most purchases and payments relate to animal and fish acquisition, feeding and medical care, as well as to hotel administration and operations. To assist you in preparing the planning memorandum, Ms. Smith has provided you with unaudited financial statements prepared by the CFO (exhibits 1a and 1b) and other relevant client information (exhibit 2). Upon reviewing this information, you recognize that, because today's date (May 1) precedes OVWAP's year-end (May 31), only 11 months of operations are included presently in OVWAP's income statement. Ms. Smith's discussions with the CFO indicate that although the balances on the 12-month income statement will be larger, their relative percentage of revenues (as shown) is unlikely to change.

Requirements

1. Identify two individuals or groups, other than the accounting firm, who benefit from this special investigation. Explain how each beneficiary is likely to be affected by having this engagement performed. Does all of the beneficiaries necessarily have an economic stake in the outcome of the engagement?

2. Identify and evaluate general factors that affect the risk of earnings misstatement. Be sure to include factors that might increase your assessments of risk, as well as any factors that might reduce those assessments. Do not delve into evaluating individual balances yet--instead, keep your evaluation at the level of general risk factors.

3. Identify specific account balances that are likely to be misstated, not representative of ongoing operations, or difficult to verify. When justifying your comments, you might find analytical procedures (e.g., ratio and trend comparisons) helpful.

ACC'T"4|5-AUD|TING SPRING 20|8 accommodation fees. Each vehicle admitted to the park is charged a $20 entrance fee and approximately onethird of all park visitors stay in OVWAP's 85room hotel. With an average nightly rate of $110, hotel occupancy rates typically average 60 percent each year. Most purchases and payments relate to animal and fish acquisition, feeding and medical care, as well as to hotel administration and operations. To assist you in preparing the planning memorandum, Ms. Smith has provided you with unaudited financial statements prepared by the CFO (exhibits 1a and 1b) and other relevant client information (exhibit 2). Upon reviewing this information, you recognize that, because today's date (May '|) precedes OVWAP's year-end (May 31), only 11 months of operations are included presently in OVWAP's income statement. Ms. Smith's discussions with the CFO indicate that although the balances on the 12-month income statement will be larger, their relative percentage of revenues (as shown) is unlikely to change. Requirements 1. Identify two individuals or groups, other than the accounting firm, who benefit from this special investigation. Explain how each beneficiary is likely to be affected by having this engagement performed. Do all of the beneficiaries necessarily have an economic stake in the outcome of the engagement? 2. Identify and evaluate general factors that affect the risk of earnings misstatement. Be sure to include factors that might increase your assessments of risk, as well as any factors that might reduce those assessments. Do not delve into evaluating individual balances yet--instead, keep your evaluation at the level of general risk factors. 3. Identify specific account balances that are likely to be misstated, not representative of ongoing operations, or difficult to verify. When justifying your comments, you might find analytical procedures (e.g., ratio and trend comparisons) helpful. PAGEZOFG ORANGEVALLEYWILDANlMAL PARKCASE EXHIBIT Ia Excerpts from the Orange Valley Wild Animal Park Unaudited Statements of Income and Retained Earnings (OOOs omitted) Revenues-park admission $1,028 333% $1,120 I 333% -hotel rentals 1,907 61.7% 2,030 . 63.0% -animal sales 156 .. 5.0% H 102': 3.1% _. Total Revenues 3,091 . M 3,302 100-075 Hotel operating costs 1,3 28 439% 1,451 433% IAnimal feed and care 992 I 32.1% 1,129 342% Interest expense 198' 6.4% H 96m 2-9% - Cost of animal sales 72 23% 31 I 1.0% Depreciation 8: sh write-offs 71 I 23% 29 0.9% Restoration and other costs 162 52% 10 I 03% - Total Costs 2,823 m 2,746 M _ Income before income taxes 268 37% 556 163% Income taxes (80} M $ (167} I 7' Net income 1313 ' 6.1% 389 11.3% Retained earnings, beginning 257 . 148- Dividends (173} $ (280} I I Retained earnings, and $272 $257 PAGE 3 OH: O RAN (3 E VA LLE'T' W'I LD AN I MAL PA RF... CASE EXHIBIT lb Excerpts from the Orange Valley Wild Animal Park Unaudited Balance Sheet and Notes to the Financial Statements (OOOs omitted) Assets Cash 7$ 244- Is 113" Hotel Accounts Receivable $ 403 I $ 460 Less: Allowance - $ (70} - " $ (40} " Animals and Fish stock $ 659- $ 714'" Capital Assets $ 1,956 I 55 1,942 Less: Accumulated Amortization $ (271} $ (235) - Total Assets $ 2,921 I 39 2,954 Liabilities Accounts Payable $ 537 I 55 629 Accrued Uabilities --$ 308\": $ 155 Long-term debt 33 1,802 I : $ 1,911 I Total Liabilities $ 2,647 $ 2,695 I Shareholders' Equity - I -- l I Share Capital $ 2 I = $ 2 Retained Earnings -$ 272 1 T $ 257 " Total Stockholders' Equity 55 274 $ 259 Total Liabilities 8: Stockholders' Equity is 2,921 $ 2,954 Significant Acmunting Policies Animal and fish stock: In accordance with industry practice, the stock of fish and animals is reported at the lower of cost or market value. Market values are estimated using current replacement costs. Capital assets: Capital assets include land, man-made lakes, hotel buildings and equipment. Hotel buildings and equipment are amortized on a straightline basis over their estimated useful lives. In 2016, the remaining estimated useful life of hotel PAGE 4 OP is OMNGE'V'ALLE'T' W'ILD ANlMAL PARK. CASE ACC'T"4I5-AUDITING SPRING 20|8 buildings was reduced from 25 to 18 years. Land and man-made lakes are not amortized. Contingent Liabilities: OVWAP does not routinely collect the scientific data needed to evaluate the ecological health of its park, yet significant growth in visitors over the past 5 years is thought to be damaging park ecology. In 2016, OVWAP accrued a liability in the amount of $150 (thousand) for possible future environmental restoration costs that may be incurred as a result of deteriorating park ecology. EXHIBIT 2 Other Client Information Beginning the day OVWAP was founded, Mr. Jones carefully controlled every aspect of OVWAP's operations, using his extensive knowledge of veterinary care, marketing, and federal laws and regulations. As CEO, Mr. Jones was respected by everyone--not only OVWAP's employees and customers, but also concerned environmental and animal- rights activists. On the financial side, Mr. Jones worked closely with Newman, Controller and CFO, to design and implement a strong accounting system. All purchases of fish and animals for the park were approved by Mr. Jones; hotel profitability was reviewed by Mr. Jones and Newman on a monthly basis; and park admission revenues and cash receipts were compared daily to vehicle counts obtained from monitors installed at the admission gates. A perpetual inventory system was introduced to monitor quantities of fish and animals. The perpetual inventory system was implemented in the 2015 fiscal year to track quantities of fish and animal stock present on the OVWAP park grounds: OVWAP personnel easily can track the number of fish released into the man-made lakes, as well as the number of fish caught and removed. Unfortunately, the number of fish births and mortalities are more difficult to track. OVWAP estimates these numbers based on its prior experience, allowing for possible changes in environmental conditions. Newman has described December 2015 as an unusually harsh winter month and, accordingly, has had to "override" the perpetual system by writingoff significant quantities of fish stock. The write-off resulted in 20 percent of the December 2015 fish stock balance being charged as an expense on the income statement. In contrast to fish stock, animal stock apparently survived the harsh weather with much greater success. In fact, Newman mentioned that 30 newborn animals survived in 2015, as compared to only 20 in each of the prior three years. Many of these newborn animals were sold to private zoos and other animal parks in 2016; consequently, animal sales revenues have increased in the current year. PAGE 5 OF 6 ORANGEVALLEY WILD ANIMAL PARK. CASE ACC'T"4I5-AUDITING SPRING 20|8 The growth in successful animal births also has led Newman to reconsider the accounting policy used to record and update animal stock costs. The animal stock account primarily includes costs for adult animal purchases, although some birth related medical care costs also are included. In the past, these animal costs were assigned to each individual animal using the specific identification inventory method. Newman apparently found that method overly cumbersome, and decided to change to an average cost method for all animals in January 2016. Consequently, when newborn animals now are sold, the average cost of animal stock at the time of sale is used to determine the cost of animal sales to be expensed on the income statement. ** This assignment may be completed within a group consisting of 24 students. If you complete the assignment in a group, only one case should be turned in for your group.Additionally, since you are completing this assignment in a group setting, you obviously discuss the assignment with your group members. However, you may not discuss the assignment with any one outside your group except for the instructor, TA or Writing Center. PAGE 6 OF 6 ORANGEVALLEY WILD ANIMAL PARK. CASE ACC'T"4|5-AUD|TING SPRING 20|8 Assignment Specifics: This case project is an individual assignment and each student must turn in their own case evaluation written in their own words. However, you may choose to work with one or two other students to discuss the case and exchange ideas. If you choose to do so, please note the names of the students you discussed the case with on your assignment. The case is due on February 27, 2018 at the start of class; it should be printed and stapled. Case Overview: Assume you are an audit senior employed by an international public accounting firm. On May 1, 2016, Ms. Smith, a partner in the firm, invites you to her office to discuss a special engagement that you will be supervising. To ensure the engagement runs smoothly, she has asked you to summarize in a written planning memorandum--all important risks and factors to be considered when conducting the engagement. The client for the special engagement is Orange Valley \\Nild Animal Park (OVWAP), a privately held company that operates a safari-style wildlife park in Orange Valley, located in the U.S. Until late last year, OVWAP had been owned and managed by Mr. Jones, founder and chief executive officer (CEO). Upon Mr. Jones' death in 2015, all shares in the company were distributed to his family. Because no one in Jones' family wants to take over the business, the family will sell 100 percent of the OVWAP shares at the end of the current fiscal year to Newman, the current controller and chief financial officer (CFO) of OVWAP. Because OVWAP is a private company, a market price for the shares is not readily available. Instead, the purchase/sale price will be based on a multiple of the income earned from "ongoing operations" in the year ended May 31, 2016, calculated using US. GAAP. To ensure OVWAP's reported net income is appropriate, the Jones family has engaged your firm to provide assurance that the year-end financial statements are reliable and are representative of ongoing operations. In past years, OVWAP's financial statements always have been prepared by the CFO without audit or review. Similar to wildlife safari parks in Africa, visitors drive through OVWAP's 3,200acre park, which is home to over 100 species of native animals, birds and fish. Although hunting is not allowed in the park, fishing is permitted from man-made lakes that OVWAP constructed and began stocking with fish two years ago. The OVWAP park has become a popular year-round tourist attraction, with the number of vehicle admissions increasing from 40,000 in 2005 when the park opened to over 55,000 in the 2015 fiscal year. Most of OVWAP's revenues are earned through park admission and hotel PAGE | OF 6 ORANGEVALLEY WILD ANlMAL PARK. CASE