The Case is a TWO part case. The first part will focus on the first part of the - audit planning. The second part will focus on the accumulation of evidence and audit completion.

prepare an audit planning

and an audit memo

Boots Clothing Planning [Approximately 75 minutes of your time] Boots Clothing (BC) was established in the early 1970's by two young university students. Bob and Doug felt that there was a real niche in Canada in the manufacture and sales of comfortable sportswear such as T-shirts and sweatshirts. Since then, the company has enjoyed tremendous success and has expanded its operations into the United States and Europe. You are Tim, CPA, the audit senior in charge of the engagement of BC. BC has a year end of December 31, 2022. It is now early December 2022, and your partner has asked you to begin to plan for the year-end audit. Based on the information provided in the following exhibits, your partner has asked you to prepare a planning memo. The planning memo should include ALL aspects that you deem important and must also include key areas that you believe will need to be addressed in the upcoming audit. Exhibit #1 Excerpts from Information Gathered During Planning Selected financial information to date for BC is shown in Appendix A. Note that the 2022 numbers are unaudited. Tim noted that in previous year's files that the management bonus was based on year-end audited net income figures. BC has five manufacturing facilities throughout Canada with locations in Toronto, Halifax, Hamilton, Calgary, and Vancouver. These facilities are responsible for the manufacturing of all of Boots' clothing. Finished goods are then all shipped to a centralized warehouse in either Toronto or Vancouver. Delivers are made to customers or Boots' own stores from the Toronto and the Vancouver warehouses. " Boots currently owns five of its own stores in Ontario in addition to selling to other wholesalers and retailers. Boots is a public corporation with shares widely held. The corporation is controlled by Bob and Doug who each own 26% of the common shares outstanding. Boots generally runs in a relatively simplistic fashion even though its sales are quite significant. A new investor was brought in this year and the investor now owns 10% of the balance of the shares. During last year's audit, several errors were found. Most errors were ultimately corrected by the client. One error resulted in the understatement of revenue last year of $150,000. This amount was sent to the error summary. The audit opinion was unmodified. Inventory movements around year end are frequent and significant. Inventory balances are typically even between Vancouver and Toronto, with the other locations having considerably less. . BC's organizational structure is as follows: VP-Operations - Bob and Doug (also majority Owners) o VP-Finance - Christine o VP-Sales - Jon o VP-Marketing - Brian VP-Operations/Human Resources - Jeff VP-Computer and Technology - Rob Excerpts of conversations and information regarding details of the organization and events this year can be found in Exhibit #2 3Tim noted in discussions with Christine that BC has entered into a brand-new lease agreement The amount recorded in other assets was a patent acquired from the purchase of a company five years ago. The patent is for a specialized dye used in the manufacturing of BC's leather products. - BC signed a contract on December 2 with the Canadian Olympic Committee (COC) for the full production and selling rights for the 2024 Olympic Winter Games. The contract allows BC to design and outfit the Canadian Olympic Team and to sell souvenir merchandise with the Canadian Olympic logo. BC made the decision to purchase a small fleet of delivery trucks to cut down on distribution costs. The trucks were ordered November 15th and will cost $4,000,000. BC paid an upfront amount of $200,000 with the balance due on delivery of the trucks. The trucks are expected in late January.Exhibit #2 Company Information Rob stated in an interview with you that there were some computer issues this year. BC installed a new component onto their system this year that was supposed help integrate the sales and accounts receivable function. According to Rob there were some 'restart' issues that took place during installation that caused the network to reboot. After several tries, Rob's department was able to correct the problem. Rob stated that part of the problem was software incompatibility as BC doesn't have a proper committee to investigate computing needs as they are required. Rob also stated that BC is due for a major computer overhaul within the next year and is concerned about how this is all 'going to roll out'. Further investigation of the restart issue determined that some data was lost when the system shut down. Christine believes the amounts have all been corrected. She stated that normally an exception report is printed that would show any information not posted. Accounting staff have not been keeping these exception reports but rather throwing them in the waste basket. Jon was questioned by the audit partner about the reason behind the increase in sales over last year. Jon began discussing the current climate in the sportswear industry and continued talking about the history of sportswear. The audit partner pushed back on this arguing that the pandemic along with ination and a looming recession would put downward pressures on sales. When pushed further by the partner, Jon mentioned that sales increased this year probably due to another company that BC acquired. The VP Marketing Brian was interviewed by you. Brian is often difcult to find as he is often on the golf course with clients. According to Brian, BC lost a major contract to supply sportswear to a large group of individuals. BC has held this contract for the last ten years. It is expected that approximately 20% to 30% of BC's sales for 2024 and 2026 may be impacted by the loss of this contract with a smaller decline in other years. The clothing industry is very competitive with little customer loyalty. Jeff is the VP Operations and the acting VP Human Resources. In conversation with Jeff, he stated that the previous VP HR, John Knoxville, had left to teach surf boarding on the West Coast, citing something about the pandemic having him rethink his priorities. Jeff volunteered to take over the HR position temporarily until BC found someone. Jeff is currently in charge of all aspects of hiring based on wearing both hats. He stated in the conversation that he can see some synergies in doing both jobs as it is so much easier to hire someone now without having to discuss things with someone else. In 2022 Boots received a $350,000 grant for payroll expenses. The only stipulation was that it be used towards payroll expenses. Boots also received a $150,000 grant to offset the costs of the purchase of a new packaging machine. Exhibit #3 BC Simon Fraser Ball Caps Christine discussed an issue regarding the Simon Fraser Ball Caps (SF) with your audit partner. SF is a separate non-related company that manufactures and sells outdoor adventure gear. BC sells some of its goods to SF who in turn uses them or sells them to outside customers. In addition to the sales, BC has an agreement whereby 3% of SF sales are paid to BC as a royalty. BC agrees to provide some advertising support for this fee.Appendix A Selected Financial Information Area 2022 (unaudited') 2021 2020 (if applicable) Accounts receivable 8,531,715 6,425,983 Inventories 11,661,477 10,350,292 Development costs 0 capitalized 188,500 Property, plant, and 21,169,290 18,034,939 equipment (net Other Assets 312,750 312,750 Accounts payable 7,479,586 6,727,657 Sales 53,336,754 43,119,460 38,231,223 Gross profit 15,467,172 12,985,402 10,747,392 Selling, administrative 6,289,788 4,840,327 4,069,846 expenses Numbers are as of November 30, 2022 2 Included in sales is the $350,000 Pandemic payroll grant and the $150,000 Covid Capital Grant*** END of Part 1! You should answer the first required BEFORE reading any further. You may use the information from THIS section to answer the next section ***IT IS NOW February 15th Approximately 105 Minutes! It is now February 15, 2023, and you are Stella, CPA, lead auditor for Boots Clothing (BC). You have just been asked to take over from Tim, CPA who quit suddenly on February 10th to join the circus. Portions of the audit evidence accumulated to date for BC are included in the following exhibits, including excerpts from the planning portion of the file that Tim had completed prior to leaving. Your job is to prepare a memo to your partner. In this memo you are required to address the audit evidence accumulated, conclude where necessary and note any areas of concem because of the information obtained to date. In the memo include an action plan on how to deal with any issues. This action plan may include specic audit procedures to address an issue along with the related assertion (s). If your concern surrounds the work of the previous audit senior, you must ensure that you support it by referencing it back to Generally Accepted Auditing Standards andfor the Handbook. Ensure that you include (at the end of your audit memo) your draft management letter based on what you have found to date. The draft management letter should be based on the information obtained from CPA Tim during planning. In addition, Christine the VP Finance has asked you to provide a reconnnendation on a separate issue. See the Exhibits in this part for details. Prepare the report (s) Exhibit #1 BC Year-end Information Materiality was set at 1% of gross sales by Tim A note was added to the planning le by Tim in early January. The noted stated that BC recently changed its bonus scheme for upper management effective for the December year end. Previously, their bonus was based on net operating income. This year the management bonus is based on gross sales. The junior who performed the inventory count at the Toronto location on December 31\Exhibit #1 (Continued) Accounts Receivable Confirmations: The Junior has managed to obtain information for all 60 confirmations. Details are as follows: Book Value Audit Value Comments $1,034,567 (representing $996,734 Northern Sporting Wear - Northern Sporting Wear) Customer is disputing the balance as it says the items were not shipped until after year end. According to shipping documents printed and filed, items were shipped December 3 1 st. When the shippers were questioned, they stated that these items were not shipped until January 4th but that Management requested that the invoices be printed December 31 st $565,499 (representing 49 $565,499 Confirms were either other accounts) received in agreement or reconciled satisfactorily by the junior $322,979 (representing 10 $297,635 Confirms were either other accounts) received with incorrect amounts or reconciled with errors by the junior accountant 11Exhibit #1 (Continued) Tim had noted that during the year that BC capitalized approximately $188,500 in development costs. No audit work has yet been done on this amount, but the le notes state that in a conversation with BC, they stated the amount was capitalized as part of project that would see a new patented lightweight, weatherproof boot being created and produced by BC. Tim has noted that the development costs include drawings, marketing surveys and salaries. Tim concluded that the costs are fairly stated. BC entered into a lease agreement with AVCO leasing company. Under the agreement, AVCO would lease BC machinery used to mass produce hoodies. A scan of the agreement shows that the life of the machine is expected to be 10 years. BC will only be leasing it for 5 years as they are unsure of their lture direction with this product. The machine, however, had to be specially made for BC and there will be little use for the machine by any other company at the end of the 5 years. Tim noted that the lease is appropriately recorded as an operating lease. Patent: Recent news has suggested that there are now newer processes that can achieve the same results being achieved by BC currently with the process. This has been a signicant competitive advantage for BC for the last several years. Calculations suggest that the discounted cash ows from the patent amount to approximately $250,000. The patent is recorded as Other Assets on the balance sheet. As a part of the Olympic contract, BC received $200,000 upfront from the COC on December 20th for the design of the apparel. The money is non-refundable if BC provides the COC with acceptable clothing designs by June of 2023. The public launch of the material is set for October 2023. Should BC fail to deliver the designs, the agreement calls for a penalty payment in the amount of $350,000. Tim noted that the cash was received as the client had suggested. The trucks ordered by BC arrived on time at the end of January. 12 Exhibit #1 (Continued) Christine noted to you that Simon Fraser (SF) has not been disclosing its revenues accurately and may not be paying the correct royalty fee. BC's agreement allows them to inspect SF '5 books once every two years. Christine is concerned about the royalty amount and has asked your rm to recommend a report that will provide her with some assurance as to the revenue number. She would like you to point out any reasonable alternatives that would satisfy BC's needs. Included in the revenues is $75,000 received from the Government as part of an Ontario infrastructure program. The money is to be used to replace aging clothing making machinery and is a grant to be used for the purchase. The machinery is expected to be received by May 2023. 13 Exhibit #ZA Legal Letter Boots Company BBJ Law Firm December 31, 2022 Dear Sir(s): In connection with the preparation and audit of our nancial statements for the scal period ended December 31, 2022, we have made the following evaluations of claims and possible claims with respect to which your rm's advice or representation has been sought: Description Evaluation In September 2022, Little Billy Bob We believe that the lawsuit is excessive slipped outside the Toronto retail location and llly intend to defend it in court. We and broke his leg. Big Billy Bob is suing believe there is an 80% chance that we will Boots Company for $500,000 for pain and have to pay $90,000, 10% chance we will suffering. have to pay $150,000 and a 10% we will be found not liable. Would you please advise us, as of (effective date of response), on the following points: (a) Are the claims and possible claims properly described? (b) Do you consider that our evaluations are reasonable? (c) Are you aware of any claims not listed above which are outstanding? If so, please include in your response letter the names of the parties and the amount claimed. This enquiry is made in accordance with the Joint Policy Statement of January 1978 approved by The Canadian Bar Association and the Auditing Standards Committee of the Canadian Institute of Chartered Accountants. Please address your reply, marked "Privileged and Condential", to this company and send a signed copy of the reply directly to our auditor. Yours truly, c.c. Ryan CPA 14 Exhibit #ZB Legal Letter (Response) Privileged and Condential Boots Company February 8, 2023 Dear Sir(s): This reply to your enquiry letter of December 31, 2022 is made in accordance with the Joint Policy Statement referred to in that letter. We conrm, based on an examination of our records, that as of (effective date of response) the claims and possible claims referred to in your letter: (a) have been properly described (b) have been reasonably evaluated except for the evaluation of the outcome with respect to which we request that you arrange a conference at which our partner will discuss the matter with you and your auditor (c) include all claims which are outstanding This letter should not be quoted from or referred to in your nancial statements or in dealings with third parties without our prior written consent. Yours truly, c.c. Ryan CPA 15 Tuesday, Feb SNOW DAILY 12, 2023 Issue #1 The latest news in business and other Santa Claus Pandemic Woes Inflation hurting business Northern Sporting Wear Co., one of the largest sporting wear companies in Ontario, announced today that it was entering bankruptcy protection. News of the bankruptcy shocked the small northern town of Whoville, the hometown base for Northern. Northern employs over 789.33 500 employees. It is expected that once a detailed financial analysis is done, that very little money will be left to pay creditors what is owed. Pandemic Payroll Payback Businesses continue to show the financial strain of the Pandemic and rising interest costs The Government of Canada announced today that they were going to be examining Pandemic Payroll ll grants that many businesses received as there were some Tiny Elf errors in which businesses qualified While tight-lipped about it, the PM hinted that some businesses may have to pay Things to Read portions of the grant back. The latest updates to get you through the day In the latest updates to get you through the final exam period, it is suggested that you find some time to relax and unwind after a As a final send-off before the end of this busy semester. course, for one bonus mark, let me know one thing you hope to enjoy over the Hopefully many of you will be back in holiday time! January to complete ADMN 4807. Holiday time is coming!It is expected that once a detailed financial analysis is done, that very little money will be left to pay creditors what is owed. Pandemic Payroll Payback Businesses continue to show the financial strain of the Pandemic and rising interest costs The Government of Canada announced today that they were going to be examining Pandemic Payroll grants that many businesses received as there were some Tiny Elf errors in which businesses qualified. While tight-lipped about it, the PM hinted that some businesses may have to pay Things to Read portions of the grant back. The latest updates to get you through the day In the latest updates to get you through the final exam period, it is suggested that you find some time to relax and unwind after a As a final send-off before the end of this busy semester. course, for one bonus mark, let me know one thing you hope to enjoy over the Hopefully many of you will be back in holiday time! January to complete ADMN 4807. Holiday time is coming! Weather Sports Reindeer Games The latest updates Snowman does it again Rudolph noses out the win Jack Frost Frosty Clarice Holiday weather at your fingertips . The abominable snowman continues his Rudolph, at one point not allowed in the winning streak in the latest snowball Reindeer Games, noses out a win. games. Page 10 Page 4 Page 8 Page 1 16