You are an audit manager of PmG, CPAs and you are planning the first-time audit of a Food Company (FC) for the year ended December 31, 2020. PmG was awarded the audit because the partner in charge has been friends with the CEO for years. When the CEO reached out, the Partner accepted the engagement right away because he is sure they will issue a clean opinion. The Partner has said he wants to rely mostly on management representations to save time.

FC sells frozen fruit and berries. It sells about 80% of its products to large supermarkets and the remaining 20% to restaurants. You attended a planning meeting and made the following notes:

Planning meeting notes:

During 2020, a pandemic swept across the world. Consumer frozen fruit sales exploded because consumers were afraid to buy fresh fruit. To support the additional demand, the company installed more efficient manufacturing equipment. The purchase and installation of the $1.5M new equipment was reported as property, plant and equipment and included installation costs of $75,000 and a five-year servicing and maintenance plan of $75,000. To finance the new equipment, FC borrowed $1.2M from Canada. Because of the pandemic, the company also received a wage subsidy of $200K from the Canadian government to offset payroll expenses.

During this time, the restaurant side of the business struggled because many restaurants were forced to close or run at reduced capacity. FC offered extended credit terms of 90 days, up from 30, to help its struggling customers. Also, to maintain sales levels, FC began selling its berries to the US. The CFO informed you that there was a problem with some of these berries. They were accidentally labelled organic, and then sold before the issue was identified. Sales of these berries were stopped, and the product was recalled. Management believes the recalled berries can be re-sold once they are properly labelled for a discounted price.

The CFO was hired in late mid December to put together the year end financial statements because the CFO that had worked there for many years suddenly became ill. The CFO has provided you with extracts for the year ending December 31, 2020 that he and the reduced staff that work remotely have put together.

Current Year ($)

Prior Year ($)

Revenue

9,850,000

6,990,000

Gross Profit

2,410,000

1,190,000

Total Assets

4,950,500

4,260,000

Net Income (loss) before tax

410,000

190,000

Gain on Sale of Disposal (included in NIBT)

500,000

Days in Receivable

85 days

33 days

Part A

Identify five factors that impact the risk of material misstatement. Explain how each factor impacts the risk assessment. (10 marks)

Part B

Calculate and conclude on planning and performance materiality for the current year. Use three possible benchmarks at the high end of the range. (7 Marks)

Part C

Identify and explain 4 Code of Conduct/ Client Acceptance issues (4 Marks)

Part D

List 4 assertions that apply to the new machinery. What procedure/ evidence should the auditor obtain to verify that assertion. (4 marks)