This is an audit case.

Question 1. Provide any Weaknesses, Implications, Recommendation, Procedures, and Assertions based on the internal controls of Boss Ltd.

Question 2. Prepare the planning materiality. Setting materiality for users and financial statement areas of most concern to the user. Explain why the normalizing adjustments are made and why that base was chosen. Include calculation of planning materiality.

Question 3. Analyze the legal and accounts receivable confirmations from Exhibit IV and identify proposed adjustments to account balance along with any other procedures that should be performed to gather additional information related to these confirmations. Calculate audit projected error and known errors. Discuss the amount of error that would need to be adjusted based on the calculated planning materiality in Question 1.

Boss LTD is an owner-managed machinery manufacturer that specializes in producing small electric utility tractors for commercial use in London, England. Jack Boss, the sole shareholder, started the business in 2012; his son, Andrew, is the controller. BOSS LTD recently won a bid from a large client. To ensure that BOSS LTD can deliver this large order, the new client wants to review the audited financial statements before finalizing the contract. In particular, they have indicated that they are interested in seeing the extent of BOSS LTD revenue. You are an associate articling with the firm of Ron & Harry Chartered Professional Accountants (RH). BOSS LTD has recently engaged RH as the auditor for the company. In prior years, BOSS LTD's financial statements were audited by a local public accounting firm. Emma White, the partner responsible for the file, has already dealt with all client acceptance issues. It is now October 31, 2019. You are meeting with Emma, who provides you with the following details. Emma: Here are the draft September 30, 2019, financial statements (Exhibit I). I met with Jack and Andrew last week to discuss the audit; here are my meeting notes, with some general information about BOSS LTD (Exhibit II). I would like you to prepare part of the audit planning memo for this new client. Please ensure that the planning materiality determinations are included. I also want you to assess controls to determine our audit strategy. Your analysis should tie into the key accounts and assertions impacted. I would like you to prepare audit procedures based on your analysis. As inventory is BOSS LTD's largest asset, another associate, Mark, attended the inventory count on September 30. He has documented his observations of the count and the procedures he performed (Exhibit III). I would like you to develop the follow-up audit procedures we will perform for each key inventory account assertion. As well, I would like you to review Marks's observations of the count and identify the risks and control improvements related to inventory count procedures that we will communicate to the client as recommendations. Mark has already sent out the accounts receivable and legal confirmations. Here is a summary of the results (Exhibit IV). He didn't have time to discuss the results with the client, so you will have to do all of the follow-up work. If you identify any potential adjustments to the financial statements, please prepare them, so I can add them to the summary of identified misstatements. Also, please explain what audit procedures you will perform related to the accounts receivable and legal confirmation results. Exhibiti Boss Ltd. Comparative Financial Statements As at September 30, 2019 BALANCE SHEET 2019 2018 (Draft) (Audited) ASSETS Current assets: Cash Short-term investments Accounts receivable Prepaid expenses Inventory 80,938 80,000 237,564 19,743 764,970 1,183,215 47,889 30,000 174,567 13,776 531,343 797,575 Property, plant, & equipment 300,766 1,483,981 330,889 1,128,464 LIABILITIES AND SHAREHOLDER'S EQUITY Current liabilities: Accounts payable and accruals Income taxes payable Current portion of note payable 236,515 40,075 30,000 306,590 370,998 30,087 30,000 431,085 Bank loan Other liabilities (Note 1) 200,000 155,000 661,590 230,000 67,000 728,085 Shareholder's equity Retained earnings 100 822,291 822,391 1,483,981 100 400,279 400,379 1,128,464 Notes: Note 1 - This includes contingent liabilities. Exhibit I (continued) Boss Ltd. Comparative Financial Statements As at September 30, 2019 STATEMENT OF INCOME 2019 (Draft) 2018 (Audited) Revenue Cost of goods sold 3,500,000 1,437,900 3,115,400 1,414,419 Gross profit 2,062,100 1,700,981 Expenses: Advertising & promotion Amortization Automobile Insurance Interest on notes payable Office & supplies Professional fees Repairs & maintenance Salaries Travel Utilities 25,745 30,123 24,000 20,983 12,564 45,876 47,899 62,899 1,190,345 8,675 147,678 1,616,787 19,876 34,567 24,000 22,567 14,653 42,345 25,876 123,459 987,543 4,981 124,984 1,424,851 Income before taxes Gain(loss) on investments Income taxes 445,313 6,786 30,087 276,130 2,564 24,765 Net income after tax 422,012 253,929 Exhibit I (continued) Boss Ltd. Comparative Financial Statements As at September 30, 2019 STATEMENT OF RETAINED EARNINGS 2019 (Draft) 2018 (Audited) Net income after tax 422,012 253,929 Retained earnings, opening 400,279 146,350 Retained earnings, closing 822,291 400,279 Exhibit II Boss Ltd. Meeting Minutes (Prepared by Emma White, CPA) Since its inception in 2012, BOSS LTD has had increasing income. Jack is involved in all aspects of the business. He negotiates prices for parts with the suppliers, ensures that manufacturing of the tractors is up to standards, is involved in the hiring of employees, and reviews the financial statements. Andrew is a CPA; he joined his father in the business in 2016, when he received his designation. Andrew receives an annual bonus of 3% of net income before tax. This year, Jack gave all of his staff a bonus, as they had received no wage increases in the last two years due to the sluggish economy. The total bonus amount paid was $25,000. Jack and Andrew are not concerned about implementing additional controls, as they feel that BOSS Ltd.'s processes are straightforward, and its employees are trustworthy. Jack sold a robotic welder for $3,000, as it was fully depreciated and was no longer required for building the tractors. . The financial processes are fairly manual; BOSS Ltd. uses an off-the-shelf accounting package for its GL. With the current potential growth, Jack and Andrew feel that the current GL application may no longer meet their needs. Exhibit III Observation of Inventory Count and Count Procedures Performed (Prepared by CPA, associate) Observation of BOSS Ltd's Inventory Count on September 30, 2019 Inventory ranges from inexpensive parts, such as nuts and bolts, to valuable items, such as motors. In addition to raw materials, inventory also includes completed tractors. There is no work in process. A manager, who deals with Boss Ltd's inventory on a daily basis, supervised the count; most of the counters were those office staff available at the time. There weren't any written count procedures, but the manager said he told each count team which area to count and asked that one member of the team perform the count and that the other member re-count it before writing it down. Rather than marking which areas are counted, Boss Ltd. uses the pre-numbered count sheets to ensure all inventory is counted. Each count team took a pre-numbered count sheet from the manager, recorded their counts on the count sheet, and then handed it back to the manager. When a difference was found between the count sheet and inventory records, a re-count was performed. In the cases where there was still a difference, the manager considered this an error, and investigated the difference prior to changing the inventory records. The counters counted all inventory on the shelves, no matter what condition it was in. I asked the owner of Boss Ltd. about this and found that the only time Boss writes off inventory is when it is taken off the shelves to be used but is found to be damaged or obsolete. According to the owner of Boss, this does not happen very often. Shipments were received during the count, and one staff person was dedicated to receiving the shipments into the inventory system and placing those items on the shelves. Count Procedures Performed a. 1. I inspected the inventory for items that looked old or damaged, and found the following: Two engines that looked old, as they were dusty (Value of 3,000 each) b. Three boxes of nuts that were rusty (Value unknown) c. 10 sets of tires that were deflated (Total value of 10,000) 2. I performed test counts of the inventory. I selected a sample of 15 from the count sheets and traced them to the physical inventories on the shelf and selected a sample of 15 from the physical inventories on the shelf and traced them to the count sheets. I found one error, in which the count sheet indicated that there were 290 gearboxes; when I counted, I found 250 gearboxes. When I informed the inventory manager of this difference, there was a re-count, and 250 was found to be the correct number. The inventory manager adjusted the amount in the system. 3. I obtained a copy of the final inventory listing and the count sheets. Accounts Receivable and Legal Confirmation Results Legal Confirmation Results: Legal Sample total Value: 115,000 Legal Counsel Confirmation Description of Claim BOSS LTD's Evaluation Sent Confirmation Results Wrongful dismissal of This lawsuit arose in Maxwell & Mica Legal counsel agreed with Leon, an employee of 2017. We believe we will LLP BOSS LTD's evaluation. BOSS LTD. Leon was settle for $67,000 before fired for not following it reaches court, and we manufacturing safety have accrued this amount. protocol. He is suing for $120,000. Injury lawsuit of Mary for The lawsuit arose in Maxwell & Mica The evaluation provided by $100,000. Mary was an 2018. We believe we will | LLP the lawyers is a settlement employee of BOSS LTD, settle for $48,000 before of $78,000 who was injured on the it reaches court, and we job in the repair shop. have accrued this amount. Lawsuit from Carefore Ltd. Not identified by BOSS LTD. Patni & Sons LLP Carefore Ltd., a supplier of BOSS LTD, is suing for $30,000 for breach of contract in 2018. The lawsuit will be settled for $15,000 before it reaches court. Accounts Receivable Confirmation Results: AR Sample total Value: 209,909 Note - We sent five confirmations to high value accounts, which make up a significant portion of total AR population. Note: the amount confirmed by the customer is assumed accurate, and therefore any difference is a known error. Customer Nx's Inc DRS AR Sub-ledger Amount (CAD) $67,800 Amount Confirmed by Customer $59,325 Jill-Mart Inc. Emb Grocery Ltd. $20,756 $40,124 $20,756 0 Customer Response Invoice said we received eight tractors, but we received seven. Nil We sent the cheque for $40,124 on September 29, 2019. Used a USD exchange rate of 0.9552. We received the goods on October 2, 2019. Halal Halal Inc. $30,578 $29,208.11 Pata Shoes Ltd. $50,651 0 Boss LTD is an owner-managed machinery manufacturer that specializes in producing small electric utility tractors for commercial use in London, England. Jack Boss, the sole shareholder, started the business in 2012; his son, Andrew, is the controller. BOSS LTD recently won a bid from a large client. To ensure that BOSS LTD can deliver this large order, the new client wants to review the audited financial statements before finalizing the contract. In particular, they have indicated that they are interested in seeing the extent of BOSS LTD revenue. You are an associate articling with the firm of Ron & Harry Chartered Professional Accountants (RH). BOSS LTD has recently engaged RH as the auditor for the company. In prior years, BOSS LTD's financial statements were audited by a local public accounting firm. Emma White, the partner responsible for the file, has already dealt with all client acceptance issues. It is now October 31, 2019. You are meeting with Emma, who provides you with the following details. Emma: Here are the draft September 30, 2019, financial statements (Exhibit I). I met with Jack and Andrew last week to discuss the audit; here are my meeting notes, with some general information about BOSS LTD (Exhibit II). I would like you to prepare part of the audit planning memo for this new client. Please ensure that the planning materiality determinations are included. I also want you to assess controls to determine our audit strategy. Your analysis should tie into the key accounts and assertions impacted. I would like you to prepare audit procedures based on your analysis. As inventory is BOSS LTD's largest asset, another associate, Mark, attended the inventory count on September 30. He has documented his observations of the count and the procedures he performed (Exhibit III). I would like you to develop the follow-up audit procedures we will perform for each key inventory account assertion. As well, I would like you to review Marks's observations of the count and identify the risks and control improvements related to inventory count procedures that we will communicate to the client as recommendations. Mark has already sent out the accounts receivable and legal confirmations. Here is a summary of the results (Exhibit IV). He didn't have time to discuss the results with the client, so you will have to do all of the follow-up work. If you identify any potential adjustments to the financial statements, please prepare them, so I can add them to the summary of identified misstatements. Also, please explain what audit procedures you will perform related to the accounts receivable and legal confirmation results. Exhibiti Boss Ltd. Comparative Financial Statements As at September 30, 2019 BALANCE SHEET 2019 2018 (Draft) (Audited) ASSETS Current assets: Cash Short-term investments Accounts receivable Prepaid expenses Inventory 80,938 80,000 237,564 19,743 764,970 1,183,215 47,889 30,000 174,567 13,776 531,343 797,575 Property, plant, & equipment 300,766 1,483,981 330,889 1,128,464 LIABILITIES AND SHAREHOLDER'S EQUITY Current liabilities: Accounts payable and accruals Income taxes payable Current portion of note payable 236,515 40,075 30,000 306,590 370,998 30,087 30,000 431,085 Bank loan Other liabilities (Note 1) 200,000 155,000 661,590 230,000 67,000 728,085 Shareholder's equity Retained earnings 100 822,291 822,391 1,483,981 100 400,279 400,379 1,128,464 Notes: Note 1 - This includes contingent liabilities. Exhibit I (continued) Boss Ltd. Comparative Financial Statements As at September 30, 2019 STATEMENT OF INCOME 2019 (Draft) 2018 (Audited) Revenue Cost of goods sold 3,500,000 1,437,900 3,115,400 1,414,419 Gross profit 2,062,100 1,700,981 Expenses: Advertising & promotion Amortization Automobile Insurance Interest on notes payable Office & supplies Professional fees Repairs & maintenance Salaries Travel Utilities 25,745 30,123 24,000 20,983 12,564 45,876 47,899 62,899 1,190,345 8,675 147,678 1,616,787 19,876 34,567 24,000 22,567 14,653 42,345 25,876 123,459 987,543 4,981 124,984 1,424,851 Income before taxes Gain(loss) on investments Income taxes 445,313 6,786 30,087 276,130 2,564 24,765 Net income after tax 422,012 253,929 Exhibit I (continued) Boss Ltd. Comparative Financial Statements As at September 30, 2019 STATEMENT OF RETAINED EARNINGS 2019 (Draft) 2018 (Audited) Net income after tax 422,012 253,929 Retained earnings, opening 400,279 146,350 Retained earnings, closing 822,291 400,279 Exhibit II Boss Ltd. Meeting Minutes (Prepared by Emma White, CPA) Since its inception in 2012, BOSS LTD has had increasing income. Jack is involved in all aspects of the business. He negotiates prices for parts with the suppliers, ensures that manufacturing of the tractors is up to standards, is involved in the hiring of employees, and reviews the financial statements. Andrew is a CPA; he joined his father in the business in 2016, when he received his designation. Andrew receives an annual bonus of 3% of net income before tax. This year, Jack gave all of his staff a bonus, as they had received no wage increases in the last two years due to the sluggish economy. The total bonus amount paid was $25,000. Jack and Andrew are not concerned about implementing additional controls, as they feel that BOSS Ltd.'s processes are straightforward, and its employees are trustworthy. Jack sold a robotic welder for $3,000, as it was fully depreciated and was no longer required for building the tractors. . The financial processes are fairly manual; BOSS Ltd. uses an off-the-shelf accounting package for its GL. With the current potential growth, Jack and Andrew feel that the current GL application may no longer meet their needs. Exhibit III Observation of Inventory Count and Count Procedures Performed (Prepared by CPA, associate) Observation of BOSS Ltd's Inventory Count on September 30, 2019 Inventory ranges from inexpensive parts, such as nuts and bolts, to valuable items, such as motors. In addition to raw materials, inventory also includes completed tractors. There is no work in process. A manager, who deals with Boss Ltd's inventory on a daily basis, supervised the count; most of the counters were those office staff available at the time. There weren't any written count procedures, but the manager said he told each count team which area to count and asked that one member of the team perform the count and that the other member re-count it before writing it down. Rather than marking which areas are counted, Boss Ltd. uses the pre-numbered count sheets to ensure all inventory is counted. Each count team took a pre-numbered count sheet from the manager, recorded their counts on the count sheet, and then handed it back to the manager. When a difference was found between the count sheet and inventory records, a re-count was performed. In the cases where there was still a difference, the manager considered this an error, and investigated the difference prior to changing the inventory records. The counters counted all inventory on the shelves, no matter what condition it was in. I asked the owner of Boss Ltd. about this and found that the only time Boss writes off inventory is when it is taken off the shelves to be used but is found to be damaged or obsolete. According to the owner of Boss, this does not happen very often. Shipments were received during the count, and one staff person was dedicated to receiving the shipments into the inventory system and placing those items on the shelves. Count Procedures Performed a. 1. I inspected the inventory for items that looked old or damaged, and found the following: Two engines that looked old, as they were dusty (Value of 3,000 each) b. Three boxes of nuts that were rusty (Value unknown) c. 10 sets of tires that were deflated (Total value of 10,000) 2. I performed test counts of the inventory. I selected a sample of 15 from the count sheets and traced them to the physical inventories on the shelf and selected a sample of 15 from the physical inventories on the shelf and traced them to the count sheets. I found one error, in which the count sheet indicated that there were 290 gearboxes; when I counted, I found 250 gearboxes. When I informed the inventory manager of this difference, there was a re-count, and 250 was found to be the correct number. The inventory manager adjusted the amount in the system. 3. I obtained a copy of the final inventory listing and the count sheets. Accounts Receivable and Legal Confirmation Results Legal Confirmation Results: Legal Sample total Value: 115,000 Legal Counsel Confirmation Description of Claim BOSS LTD's Evaluation Sent Confirmation Results Wrongful dismissal of This lawsuit arose in Maxwell & Mica Legal counsel agreed with Leon, an employee of 2017. We believe we will LLP BOSS LTD's evaluation. BOSS LTD. Leon was settle for $67,000 before fired for not following it reaches court, and we manufacturing safety have accrued this amount. protocol. He is suing for $120,000. Injury lawsuit of Mary for The lawsuit arose in Maxwell & Mica The evaluation provided by $100,000. Mary was an 2018. We believe we will | LLP the lawyers is a settlement employee of BOSS LTD, settle for $48,000 before of $78,000 who was injured on the it reaches court, and we job in the repair shop. have accrued this amount. Lawsuit from Carefore Ltd. Not identified by BOSS LTD. Patni & Sons LLP Carefore Ltd., a supplier of BOSS LTD, is suing for $30,000 for breach of contract in 2018. The lawsuit will be settled for $15,000 before it reaches court. Accounts Receivable Confirmation Results: AR Sample total Value: 209,909 Note - We sent five confirmations to high value accounts, which make up a significant portion of total AR population. Note: the amount confirmed by the customer is assumed accurate, and therefore any difference is a known error. Customer Nx's Inc DRS AR Sub-ledger Amount (CAD) $67,800 Amount Confirmed by Customer $59,325 Jill-Mart Inc. Emb Grocery Ltd. $20,756 $40,124 $20,756 0 Customer Response Invoice said we received eight tractors, but we received seven. Nil We sent the cheque for $40,124 on September 29, 2019. Used a USD exchange rate of 0.9552. We received the goods on October 2, 2019. Halal Halal Inc. $30,578 $29,208.11 Pata Shoes Ltd. $50,651 0