The Manoir Ville-Marie (MVM) is a privately-owned hotel located in the greater Montreal area. MVM reports under ASPE with a September 30 year-end. You, CPA, are a junior auditor for Couchoux & Clroux Partners (CCP), a local firm that has completed the audit of MVM for several years. The partner on the MVM audit just sent you an email with the following information and requests: Hi CPA, You will find below some information about MVM and about various transactions that occurred during the year. I would like you to assess the risk of material misstatement for the 2022 audit and to determine overall, performance, and specific materiality, if relevant. And if you could start thinking about the audit strategy and identify the three riskiest balances in the financial statements (and the relevant assertions), that would be great. Finally, I would like you to prepare a memo that we could send to MVM and that would summarize any control weaknesses that you identify. Please, make sure to explain the impact of these weaknesses, and provide recommendations for improvements. Answer the partners requests in a report. This is an individual assignment, and your report should represent your own work and effort. Remember to explain your thought process. Submission guidelines: - No page limit (keep it reasonable).

GENERAL INFORMATION MVM was created in 2010. The hotel rapidly grew to become one of the most popular hotels in the area because of its incredible location and view. However, the owners of MVM have been concerned recently with the lack of growth and put a lot of pressure on Mark, the Chief Financial Officer, and Claude, the Chief Executive Officer, to increase income and improve the hotels reputation. Mark is a CPA who has been with MVM since its creation. The owners regularly look at online reviews on various platforms to assess guests satisfaction and the popularity of the hotel. It is not rare for Claude to receive questions from the owners about the bad comments left online by unhappy guests. To prevent this, Claude implemented a bonus policy: guests are asked about their experience in a survey and any employee that they mention in their response gets a point. Employees can receive up to $10,000 if they accumulate over 50 points. To keep up with the owners desire for growth, Mark and Claude have been working on several projects.

Prestige suites: Mark and Claude have decided to add a new aisle to the hotel in order to offer Prestige suites. This extension was financed by the bank and the new loan obtained in October 2021 include covenants. MVMs debt ratio must be below 0.5, among other requirements. MVM hired a local contractor to build the extension. Because people were complaining about the noise during the construction phase (Fall 2021), employees were allowed to give unhappy guests discretionary discounts and offer other perks such as free massages at the hotel spa. The Prestige suites were finalized the first week of December 2022 and many guests got preferred rates per night and free activities during the construction project, which helped with the online reviews. Mark asked hotel employees to document every transaction (discount and free activities) in a notebook and send pictures of the documentation to the accounting team. Total revenue was particularly difficult to track during this period and Mark and Claude had a hard time making sense of the average price per night charged to guests during the construction phase. One of the hotel employees convinced their whole family to celebrate New Year at the hotel. The family booked 15 rooms and complained about the fresh paint smell. The employee decided to give their family a discount and they also got to try most of the hotel facilities for free: the spa, massages, 3-course menu at the restaurant... They all seem happy with their experience and left amazing online reviews. The Prestige Suites have attracted a new clientele who is not afraid of the $500+ price per night. However, some of these new guests have been complaining about the Suites being unavailable, which has caught the owners attention. Guests can book the Prestige Suites by calling the hotel or by using the online reservation system. If guests want to cancel or modify their reservation, they must call MVM and get somebody to do it for them. Every employee has access to the system and can modify reservations. When new hotel staffs are hired, MVM gives them access to all systems in the company, including the reservation and the accounting systems. Employees can thus explore the systems when they are less busy and better understand how MVM operates. Guest can cancel reservations free of charge up until the first day of the reservation. Because most people do things last minute these days, it is difficult to estimate the hotel occupation and to know which Suite will be available. Mark and Claude have noticed that the Prestige Suites are often booked but that many guests end up cancelling their reservation. When a Suite is available, hotel employees can decide to upgrade some of the guests staying in a regular room free of charge. As a result, most Suites are used by MVMs regular clientele. Mark knows that some employees receive large tips for these upgrades.

Restaurant: Historically, the restaurant located next to the hotel lobby was owned and operated by Phil, a chef. MVM rented the space to Phil and perceived commissions on the restaurants revenues. Mark and Claude decided not to renew the agreement with Phil and to open a restaurant that would be 100% controlled and operated by MVM. The new restaurant opened on January 1st, 2022. Mark and Claude have no experience operating restaurants and have run into a number of problems since the grand opening. For the first 10 weeks, there were issues with the software that MVM bought to manage the restaurant. As a result, guests could only pay by cash and the waiters had to write multiple notes for the kitchen and for the accounting team. Despite this, they were discrepancies between the cash register and the notes provided by the waiters every day, to the point that Mark asked the accounting team to focus on getting the software to work instead of spending all their time reading and reconciling notes. In March, the software provider finally solved the issue and provided training to Mark and one waitress, Elena, who then showed her colleagues how to use the restaurant software. There are still discrepancies every day between the software and the accounting system, but Mark is happy with the progress.

The restaurant guests can now pay their food at the restaurant or charge their room. Guests usually prefer the second option. Before accepting a room charge, waiters are supposed to verify with the hotel system that the guests are still active and have not checked out yet. However, this verification is rarely performed and there have been instances of guests charging a room that is not theirs or that is not active anymore. Guests can also ask for the restaurant food to be delivered to their room by calling the front desk. The restaurant waiters get a commission on the food served in the restaurant while the hotel employees get commissions on the food ordered by phone and delivered to the rooms. Some of the restaurant waiters think that hotel employees are advising guests to order food rather than eat at the restaurant. Although Mark and Claude do not care about the gossips between the restaurant and the hotel, they have become more concerned with the restaurant inventory. Some menu items are often out of stock and large quantities of other items have been regularly thrown out because of expiry date issues. This has made the inventory provision difficult to estimate for the accounting team. Elena is responsible to purchase food from the suppliers, but she keeps getting mixed information from the kitchen. She often has to make decisions herself despite not being a chef and not working in the kitchen.

Local festival: MVM is considering entering a partnership with a local festival that happens every Summer during the first weekend of September. As part of the agreement, MVM would make the hotel rooms available to festival participants at 65% of the regular price per night. In return, the festival organizers would promote MVM on their merchandise and would encourage participants to book a room with MVM during the festival. Mark and Claude believe that this would help with the hotels visibility. In order to move forward with the partnership, the festival organizers have asked to see MVMs audited financial statements.

EXCERPTS FROM MVM FINANCIAL STATEMENTS Income Statement For the year ended September 30, 2022 (unaudited) Revenue Hotel $ 16,399 Revenue Restaurant 823 17,222 Operating costs Hotel 5,750 Operating costs Restaurant 854 Advertising 713 Administrative 2,000 Amortization and depreciation 4,095 Interest expense 421 13,833 Income before tax 3,389 Tax expense 847 Net income $ 2,542 Balance Sheet As at September 30, 2022 (unaudited) Cash $ 767 Accounts receivable 939 Inventories 608 Property, plant, and equipment - Net 16,342 $ 18,656 Payables and accruals $ 613 Bank loan 8,500 9,113 Share capital 5,000 Retained earnings 4,543 $ 18,656