You are a CPA and was hired to work for Soaring High Limited as the manager of financial reporting on January 7^th 2021. Your current duty is to review the first draft of the quarterly reporting package and provide comments to the financial reporting team on any issues that you note. Just prior to reviewing the quarterly report, you were interrupted by an email from Sara, the CFO of Soaring.

The email reads: We have an upcoming audit committee meeting next week and I would like you to prioritize this request and help prepare a response to the management letter we received from the external auditors for the year ended September 31^st, 2021 first, before commenting on the quarterly report.

George, who is in charge of our internal audit work among his many other duties has looked into the issues and prepared our responses below. Please review the draft report prepared by George, and make sure that the auditors will be satisfied with our response.

From George, the internal auditor: Management letter and internal audit department responses:

Please find my summary for your perusal. I am sure you will agree with my responses once you go through it. However, if you think we need to implement any new controls, please let me know.

Based on the procedures I performed and those performed by the external auditors at year-end, and the fact that they did not note any material differences, our existing controls are considered adequate.

Company background information: Soaring High Limited is a manufacturer and distributor of Hockey gears for a professional Canadian Sports Association. The manufacturer is established in the US and has been in the business over 20 years. On October 1st, 2019, Soaring High Limited decided to go public. It has one plant in the US, and it has one in Canada that is operated through a subsidiary of Soaring High Limited.

Required:

1. You are to comment as a CPA in your current role on the email that you received from Sara, the CEO. What is your reaction to her email? Provide possibly two reasons that would support your answer to fulfill her request or deny it. 5 marks
2. In your current role as a CPA, comment on Georges email and his response as an internal auditor. What is your reaction after reading his email as well as his response. Do you agree with Georges feedback? Support your answers in identifying the functions of an internal auditor. 10 marks
3. If you were an external auditor, would you be satisfied with Georges substantive testing? Provide your reasoning. Think on the impediments of your future contract with Soaring High. 10 marks
4. If you were the management, comment on each issue raised by the external auditor. What is your responsibility? 25 marks

Areas ofissues identified Consolidation External Auditor's response Internal audit testing and response The Canadian and U.S. companies are consolidated examined the spreadsheet last year, and it was fine. We using a large spreadsheet that is maintained solely by have always adjusted for the differences because they are not the accounting manager. Modifications have been made material enough for us to spend more time on them. to the spreadsheet, and, as a result, small differences are recorded in retained eamings. No formal process is in place to verify the accuracy of the spreadsheet. Capital asset software We identified several deficiencies in our review and I performed my own test of reasonableness. There were evaluation of amortization processes. A software minimal acquisitions during the year ended September program calculates an amortization amount on a 31st, 2022. Any variances resulted from differences monthly basis, which is then recorded as a journal between the amortization rates used in the system and entry directly to the general ledger. However, the those used in my reasonableness tests. The variances program has not been reviewed to ensure that were immaterial additions and deletions are recorded properly and amortization policies are applied appropriately. Due to recent staffing changes, current staff members have inadequate knowledge of the software. As a result, the software is no longer tracking the detailed cost build-up of individual assets for acquisitions. Only the final costs of assets are known. Also, there is no process for completing a reasonableness check of the balances. Segregation of duties In addition, there is a lack of segregation of duties. Unfortunately, the accounting department is short The person maintaining the contract files is also staffed. Nothing can be done to address the segregation of responsible for making deposits and doing bank duties issue. reconciliations. Since there are insufficient controls for contract approval and modification, this person could modify contracts and deposits to disguise fraud. Only one person within the organization is Well, yes, I am very busy. But I have always been able to responsible for the internal audit procedures, and fit all my assigned duties into the work week. that person does not possess a recognized designation. Also, that person spends a significant amount of time performing other duties so has little time to dedicate to internal audit responsibilities. Internal audit Sales contract monitoring a We identified deficiencies in management's sales I performed a test of details on a few of our current contract process again this year. There is no contracts, and everything was fine monitoring process to ensure that sales contracts are adequately authorized and non-standard contracts are reviewed and approved by authorized personnel. As a result, not all contracts were approved or reviewed, and in some cases no final versions of contracts could be found. Areas ofissues identified Consolidation External Auditor's response Internal audit testing and response The Canadian and U.S. companies are consolidated examined the spreadsheet last year, and it was fine. We using a large spreadsheet that is maintained solely by have always adjusted for the differences because they are not the accounting manager. Modifications have been made material enough for us to spend more time on them. to the spreadsheet, and, as a result, small differences are recorded in retained eamings. No formal process is in place to verify the accuracy of the spreadsheet. Capital asset software We identified several deficiencies in our review and I performed my own test of reasonableness. There were evaluation of amortization processes. A software minimal acquisitions during the year ended September program calculates an amortization amount on a 31st, 2022. Any variances resulted from differences monthly basis, which is then recorded as a journal between the amortization rates used in the system and entry directly to the general ledger. However, the those used in my reasonableness tests. The variances program has not been reviewed to ensure that were immaterial additions and deletions are recorded properly and amortization policies are applied appropriately. Due to recent staffing changes, current staff members have inadequate knowledge of the software. As a result, the software is no longer tracking the detailed cost build-up of individual assets for acquisitions. Only the final costs of assets are known. Also, there is no process for completing a reasonableness check of the balances. Segregation of duties In addition, there is a lack of segregation of duties. Unfortunately, the accounting department is short The person maintaining the contract files is also staffed. Nothing can be done to address the segregation of responsible for making deposits and doing bank duties issue. reconciliations. Since there are insufficient controls for contract approval and modification, this person could modify contracts and deposits to disguise fraud. Only one person within the organization is Well, yes, I am very busy. But I have always been able to responsible for the internal audit procedures, and fit all my assigned duties into the work week. that person does not possess a recognized designation. Also, that person spends a significant amount of time performing other duties so has little time to dedicate to internal audit responsibilities. Internal audit Sales contract monitoring a We identified deficiencies in management's sales I performed a test of details on a few of our current contract process again this year. There is no contracts, and everything was fine monitoring process to ensure that sales contracts are adequately authorized and non-standard contracts are reviewed and approved by authorized personnel. As a result, not all contracts were approved or reviewed, and in some cases no final versions of contracts could be found