Piikani Tool and Supply Corp. $($PTS$)$ is an Indigenous$-$owned chain of light tool rental stores headquartered in Edmonton, Alberta. The company was incorporated in the $90$s and has grown from a single store in Sherwood Park to over $30$ stores throughout Alberta and BC$,$ capitalizing on the growth of the mining, oil, and gas sectors in these provinces.

After years of slow and steady growth, opening only one new store per year, PTS opened $10$ new stores in $2023.$ Tom Morris, representing Prairie Sky$,$ an Indigenous Economic Development Corporation and the controlling shareholder of PTS$,$ felt that rapid expansion was necessary to make the brand visible in the fast$-$growing real estate development industry. This pivot helps PTS diversify away from the volatility of the resource sector. The expansion was financed by a $10-$year term loan from PTS$$s bank. Tom noted that the bank appears to be concerned with the profitability of the company.

Harford & Harford LLP $($H&H$),$ a mid$-$sized professional services firm, has been PTS$$s auditor since its inception. You, CPA, are the audit senior on the PTS audit for the year ending December $31,2023.$ It is now January $15,2024,$ and the engagement partner calls you into her office to explain that the audit will begin in early February. PTS$$s bank is eager to see the audited financial statements due to a new loan granted during the year.

$$I met with Tom a few months ago and he told me about PTS$$s expansion, and the new programs adopted during the year. The controller of PTS has sent us the year$-$end financial statements $($Appendix I$).$ Here are my notes from that meeting $($Appendix II$).$ I would like a memo discussing the new financial reporting issues that have arisen since the last year end. This will help us in our audit planning. PTS follows International Financial Reporting Standards $($IFRS$),$ as the company has not ruled out the possibility of going public in the future.$$

$$Also$,$ please provide a memo assessing the overall financial statement level risk of material misstatement, approach, and materiality for the $2023$ financial statement audit. We have always based materiality on income before tax and taken a combined approach to the audit.$$

Your response should be no longer than $1,800$ words, excluding any Excel files.

Core $1$ Practice Case $2$ Case

$2/3$

Appendix I

Excerpts from the financial statements

$($in thousands of dollars$)$

Statement of financial position as at December $31$

$2023($draft$)$

$2022$

$($audited$)$

Assets

Cash

$ $21$

$ $35$

Accounts receivable

$4,210$

$$

Inventory $$ Used rental tools for sale

$3,526$

$$

Other assets

$1,849$

$1,517$

Tools for rent

$10,250$

$8,664$

Property, plant, and equipment

$40,780$

$34,225$

Total assets

$ $60,636$

$ $44,441$

Liabilities and equity

Accounts payable

$ $652$

$ $3,569$

Long$-$term debt

$18,367$

$$

Due to shareholders

$4,532$

$6,483$

Common shares

$100$

$100$

Retained earnings

$36,985$

$34,289$

Total liabilities and equity

$ $60,636$

$ $44,441$

Statement of earnings for the year ended December $31$

$2023$

$2022$

Revenues

Rentals

$ $24,298$

$ $20,559$

Sales

$6,821$

$5,946$

No Late Fees

$4,539$

$$

Other

$787$

$619$

$36,445$

$27,124$

Expenses

Amortization

$659$

$450$

Cost of tools sold

$7,797$

$4,757$

Other expenses

$14,734$

$12,737$

Wages and benefits

$8,340$

$7,465$

Income taxes

$2,219$

$206$

Net income

$ $2,696$

$ $1,509$

Core $1$ Practice Case $2$ Case

$3/3$

Appendix II

Notes from meeting with Tom Morris

No Late Fees

During $2023,$ PTS introduced a new program called No Late Fees. Under the program, customers do not pay late fees for light tools that are not returned on time. If a tool is not returned within $30$ days, PTS considers the tool to be sold to the customer who rented it and the customer is charged $$300,$ which is the average cost of a new light tool. The customer then has the right to keep the tool. The program does not apply to PTS$$s expensive specialty tools, as these items have never been an issue for late return or payment.

The program has been $$tremendously successful,$$ according to Tom, as it has increased revenue from the sale of tools since many customers fail to return their rentals within $30$ days. Tom conceded that the program has upset some customers who believed that PTS had truly eliminated all forms of late fees. Most customers who have been charged for a light tool that they have not returned within $30$ days have refused to pay the charge and have simply returned the tool to a PTS store. Other customers have refused to pay the charge and have yet to return the tool. The accounts receivable on the balance sheet relates entirely to this program.

RentPoints

In January $2023,$ PTS introduced a customer reward program called RentPoints. For every $$20$ that customers spend with PTS$,$ they get one RentPoint added to their PTS account. The point$-$of$-$sale system in PTS$$s stores automatically tracks the points each time a customer rents or purchases a light tool.

Customers can then redeem RentPoints for selected rewards. For example, $100$ RentPoin