PonyUp! Stables Inc. (PonyUp!) has been a family-run business and a fixture in the horse world of Smalltown, Nova Scotia, for many years. Unfortunately, in the winter of 2018, PonyUp! announced it would be closing. Megan Pride, the town lawyer, has used the stables for years and was determined to keep PonyUp! open. Megan used all of her savings to purchase PonyUp! on January 1, 2019. The purchase was impulsive, but Megan was sure that although PonyUp! had recently been experiencing some losses, she could make the business a success. To help the business grow, PonyUp! applied for and received an operating loan shortly after the acquisition. With the new financing, the bank requested audited financial statements. Megan has approached your firm to conduct a year-end financial statement audit. PonyUp! has never prepared formal financial statements before and this will be its first audit. It is now January 25, 2020, and you, CPA, have been assigned as the senior on the audit. Information from your discussion with Megan is included in Appendix I. Notes from your discussions with the bookkeeper, Mrs. Devanney, are included in Appendix II. The partner has asked you to assess the overall financial statement level risk for the 2019 audit of PonyUp! As well, she would like you to discuss any financial reporting issues you identify and include audit procedures for the high-risk financial statement items. You will address approach and materiality at a later date, and do not need to include them now.

Please document the response with any financial reporting issues and audit procedures

Appendix I

Information from discussions with Megan Despite a bit of a rough year, I am still glad that I took on PonyUp! I have been able to provide so much benefit to the horse owners in this town and I know it is making a difference. Cash continues to be tight, and I know the bank is concerned. The previous owners had family money, and simply loaned the operations whatever was needed. PonyUp! borrowed funds from the bank to pay the previous owners. The bank loan carries a current ratio covenant. Mrs. Devanney is the administrator and bookkeeper, and the main employee on site. She does all of the scheduling for PonyUp!'s lessons and horse rentals, as well as the general office administration and bookkeeping. She has been a saviour and I let her manage the administrative side of the business. I figure I know animals and she knows the office, so together we should be fine. I take a hands-off approach to the office. Mrs. Devanney prefers this to her old boss, who was quite involved in all of her tasks. But we are still losing money. We are both looking for ways to improve our bottom line and I am confident we will get there. Our financial statements are prepared in accordance with accounting standards for private enterprises (ASPE). Mrs. Devanney took an online tutorial provided by the accounting software developer and feels she is comfortable with the accounting processes. Only cash and cheques are accepted at PonyUp! as payment methods.

Appendix II

Notes from discussions with Mrs. Devanney 1. Boarding fee revenue: PonyUp! rents out stalls to individuals who own horses and need a place to board them. An individual wishing to board his or her horse must sign a 24-month contract and pay an initial fee of $1,000. This fee is non-refundable and is recorded as revenue when received. In addition, there is a monthly boarding fee of $350, which includes all food and care, as well as the stall rental. The contract continues on a month-to-month basis after the first 24 months have passed, at which time the rate increases to $400 a month. 2. Roof repair: In December, a snowstorm caused significant damage to the barn roof, resulting in leaking and risk of rot to the barn. Work costing $35,000 was undertaken to repair it. This included replacing several pieces of the roof structure and all shingles. The new shingles are high-end and carry a 50-year warranty. Prior to the repairs, the barn roof was 25 years old and was showing signs of wear and tear. It was expected to require repairs in the near future to maintain its integrity. Mrs. Devanney has recorded this as a miscellaneous expense because she wasn't sure if it should be included as repairs and maintenance expense or added to the cost of the old roof. 3. Fencing: In the spring, fencing was added around an open field on the property, which required a 400-metre diversion of a stream around the land owned by PonyUp! The provincial Department of the Environment (DOE) agreed to the diversion under the condition that, if the stable ceases operation, PonyUp! is obligated to remove the fence and restore the stream to its "pre-diversion condition," including restocking the stream with the native fish species that was displaced. The DOE does not have the funds to perform such restorations, which can cost hundreds of thousands of dollars. 4. Horse inventory: Mrs. Devanney has recorded food and supplies as well as horses as inventory. Food and supplies include items used in the stables. Horses included in inventory are owned by PonyUp! and are available for clients to ride. Horses are also available for sale at any time. Mrs. Devanney mentioned that two years ago a horse was sold to a regular rider.