Ryan Chan is a sole practitioner operating out of his home in Oshawa, Ontario. He is a CPA and public accountant and has been for five years now. Ryan knows the importance of quality control in the firm and has policies on when to consult. He believes this to be especially important in small firms like his. To that end he has consulted you in an audit he has been working on (actually this is his only audit)—he needs your advice and direction in order to finalize the engagement. The Company under audit is Olympic Golf Shop Inc. (OGSI)—a company that makes golf clubs on the “low end” side—for beginners etc. Their products are sold at Costco and Canadian Tire to name a few. They are a private corporation and have been in business since 2004. The profit this year is a typical amount—about $ 400,000—after deducting senior management bonuses of $ 750,000. The Company has a $ 400,000 term loan from the bank as well as $ 1,500,000 line of credit. These loans are the reasons for the audit. The loans are secured by the assets of the Company. This is the first year Ryan is doing the audit—OGSI had a dispute with their previous auditors and Ryan’s aunt—who works as the manager of the ladies division of OGSI recommended they consider Ryan. OGSI was impressed with Ryan’s proposal—especially the much lower price compared to what they paid in prior years. The fiscal year end is January 31. It is now March 14.

Ryan was ready to finalize the audit –but then something happened two weeks ago—on February 28. He was at a family function and happened to run into his aunt there. She appeared to have been drinking. She asked how the audit was going and when he expected to finish. She was especially curious as to how he was going to deal with the lawsuit. Ryan had actually not heard of this before but he did not want her to think he wasn’t a good auditor so followed up carefully with her to get the details. His aunt told him that it was likely not a big deal since the lawsuit was not filed until after the year end—on February 25 to be precise. On January 15 one of their golf clubs broke (at an indoor golf practice range) and seriously hurt a child standing nearby. On February 25 they received a letter from a big law firm seeking $ 1,000,000 in damages. To make things worse his aunt said the government has since launched an investigation into the Company on the same matter—the threat being to stop sales of the related golf clubs until this matter is resolved. His aunt laughed and said that this was the least of their worries since their major customer just filed for bankruptcy this morning and they are now wondering how they will meet payroll next week. “I need another drink—I may be out of job tomorrow!”Ryan watched her walk away and wondered what he had got himself into. Back at the office the next day Ryan checked his files and noted that about 25% of the yearend inventory consists of the clubs involved in the lawsuit. He also noted that management never mentioned this to him at all—and he did not send a legal letter because there were no claims outstanding as of January 31 according to management and he had no reason to not believe them. The accounts receivable at year end for the customer who has apparently gone bankrupt was 30% of the yearend balance. However, the amount was current and the customer had responded to Ryan’s confirmation request with no issues noted. Ryan was planning to sign the audit report in the next few days. All other aspects of the audit are done. But he needs your direction on how to proceed.

Required:

Assume the role of the consultant and advise Ryan. Be as thorough as possible in your response. Minor assumptions may be made.