The Natural Cleaning Company (NCC) is a privately-held Canadian company that was founded in 2009 by Mindy Jrewl. Mindy owns 60% of the company and the remaining 40% was owned by her father, Jim, who provided Mindy money to start the business. Jim was totally hands-off from NCC and let Mindy make all operating decisions. To fund his retirement, Mindy's father recently sold his stake in NCC to a private equity firm.

Your firm of Leung & Metzer (L&M), CPAs is made up of 30 staff members, including four audit partners. After previously being audited by a different firm, your firm was approached for the first time to conduct the audit of NCC as one of the firm's partners is a close friend of Mindy. Mindy specifically requested that her friend be on the audit to help make the whole audit process easier for her. Your firm was appointed to conduct the financial statement audit of NCC for the year ending December 31, 2021.

Mindy mentioned that the prior auditor used to complete the audit within six weeks of year end and she requires the same from L&M. She also requested that L&M come with her to meet the bank once the audit report is complete to help support NCC in its requirements to meet certain conditions of their operating line of credit.

As senior of the audit, you have made the following notes:

Analyzing the Entity and Environment and Analytical Procedures

1. NCC owns three stores in the Greater Toronto Area that sell organic household cleaning products to consumers. They have been successful as they offer high-end products that consumers cannot find anywhere else. Continued growth of the Canadian economy has NCC hopeful that they can continue to open more stores across the GTA.
2. To help finance future growth, NCC obtained a secured line of credit from a local bank in 2019. The loan is secured against NCC's inventory and a condition of the line of credit is that the amount of money borrowed by NCC from the bank cannot exceed its inventory balance. NCC has currently borrowed $2 million dollars from the bank while its inventory balance is $1.8 million.
3. NCC owns a retail store in Toronto and sells a range of hair care beauty products to wholesalers and retailers. NCC invoices the wholesalers and retailers when products are delivered to them with payment terms of full payment in 30 days. NCC is looking to use funding obtained from the bank to expand its operations into other beauty products such as nail care. In order to keep prices lower than the competitors, NCC buys in bulk and encourages its store customers to use cash as payment by offering a 5% discount. This has worked well and on average, 60% of its store sales are paid by cash, the remaining 40% are paid by debit or credit cards.

1. Based on correspondence with the predecessor auditor, you learn that previous audits of NCC have taken a substantive approach to the audit as the auditors did not feel controls were operating effectively throughout NCC. Other than specific changes to the companies operation (identified below) no changes were made to NCC processes during the year.
2. You have conducted fieldwork to update your knowledge about both NCC and its industry. NCC appears to be in good financial condition as assessed from a comparison of the firm's financial ratios with those of other companies in its industry. Your firm was also engaged for the financial statement audit prior to the year-end inventory count, which you were able to attend. Based on observation and reperformance of the count, there were no concerns identified.

Obtaining an Understanding of A Perfect Shine Inc's Processes

1. Mindy has recognized the need to offer regular promotions to keep customers. In April 2021 a new program was developed to encourage customer loyalty. The program features a Privileged Customer card (PC card) and is available to all customers. It provides privileges such as discounts, event invitation and sales promotion notices. The PC cards are sold for $100 each and are valid for one year from purchase date. The controller has directed the accounting staff to record the PC card fees as revenue when the cards are sold, even though on preliminary analysis it appears that revenue recognition criteria has not been met at that time.

1. A "Do Not Pay for Six Months" (Do Not Pay) offer was extended to PC cardholders for purchases over $200. Many cardholders took advantage of this offer and purchased items under the Do Not Pay offer. As the response to both of these initiatives was positive, so far 1,800 PC cards have been sold. Mindy has noted it is important to continue to sell these cards since it enables NCC to connect with the PC card members regularly, to alert them about promotions and as a result there has been an increase in customer visits to the store.

Significant Events During the Fiscal 2010 Year Under Audit

1. NCC hired an external auditor to review the controls it implemented around the calculation and application of PC card discounts on sales to gain comfort that the system was applying these appropriately. The audit identified no deficiencies with the controls in place.

1. There have been a significant amount of PC cardholder outstanding balances that have come due in the last month, but these customers have not paid the amounts due, despite being contacted repeatedly by NCC. Mindy is not concerned about the unpaid balances since the controller has stated that these customers will return to purchase other products and can be contacted about the payments at the time of their return. As a result, no follow up has been performed with these customers
2. In May 2021, NCC purchased $250,000 of a newly released shampoo product, Flow Hair, from its largest supplier, Sure Hair Inc. (SHI). Flow Hair is a shampoo for people who are suffering from hair loss. SHI claims that Flow Hair increases the density of existing hair. Since the introduction of this shampoo in the marketplace, many incidents have been reported of it causing excessive scalp dryness. Also, many users are complaining that after one month of product use, they have not experienced increased hair density. Mindy has spoken to representatives from SHI and they indicated that these are isolated events. NCC's two largest wholesale customers are demanding refunds for their Flow Hair purchases and have hinted at exploring legal options as Flow Hair has not delivered to the product claims made by NCC or SHI.
3. The controller highlighted that a review of 2021's transactions identified consistent errors relating to sales and accounts receivables. Specifically, sales were not recorded for many sales orders for wholesalers and retailers that were shipped and delivered to their warehouses, as the signed delivery orders were misplaced. This was due to challenges associated with an employee's medical emergency that required other employees to take over the collection and storage of delivery orders over several weeks, which each employee develFFIng their own process for doing this. The Controller is confident they identified and recorded all missing transactions.

You reviewed a summary of key financial information of NCC as of December 31, 2021.

	Statement of Earnings	Unaudited	Audited
		Dec. 31,2021	Dec. 31,2020
Revenue
	Sales Revenue	4,019,500	3,244,000
	Other income	94,500	0
		4,114,000	3,244,000
Costs and expenses
	Cost of Goods Sold	2,001,250	1,700,300
	Administrative	310,000	285,000
	Interest expense	115,000	85,000
		2,426,250	2070,300
Earnings before income taxes	1,687,750	1,173,700
Income taxes	337,550	234,740
Net earnings	1,350,200	938,960
	Extracts - Statement of Financial Position
	Closing Inventory (net)	1,780,000	900,000
	Accounts receivable	1,251,100	740,198
	Accounts payable	1,148,573	818,524
	Bank Loan (Operating line of credit)	2,000,000	0
	Shareholders equity - common stock	500,000	500,000

Required:

1. Identify three case facts that impact the risk of material misstatement (inherent risks or control risks) at the overall financial statement level (OFSL, 1/2 mark each). For each factor identified, indicate if the factor increases or decreases risk (1/2 mark each), the type of risk (inherent or control, 1/2 mark each) and provide your rational for why the factor increases or decreases risk (1/2 mark each). (6 marks)

Case fact which impacts RMM at OFSL level	Does this factor increase or decrease risk	Type of risk (control risk or inherent risk)	Rationale for why this factor increases or decreases risk

1. Identify three case facts that increase/decrease the risk of material misstatement at the account balance and assertion level (1/2 mark each). For each case fact identified indicate: the account balance and assertion affected (1 mark each), whether the factor increases or decreases risk (1/2 mark each), the type of risk (inherent or control) affected (1/2 mark each) and provide your rationale (1/2 mark each). (9 marks)

Case fact which impacts RMM at the account balance level	Account balance and assertion	CR or IR?	Increase or decrease risk	Rationale for why this factor decreases/increases RMM