You are the audit manager assigned to the 2015 audit of Community Access Printers (CAP). CAP is a privately owned printing company that specializes in printing community newsletters, small local newspapers and literary magazines. Paul Pumpkinestablished the company 25 years ago and the Pumpkin family continues to own and manage the company. Over the years CAP has established a solid customer base where 90% of their business comes from repeat customers. Their niche position has allowed the company to prosper and Paul, the majority shareholder, is proud of the fact that based on company earnings he could put his two children through postsecondary school (they have no student debt) and buy a retirement property in Belize. The company has started to face some challenges as the number of customer orders has been slowly shrinking. A customer survey conducted last year indicated that their customer base is interested in reducing their environmental impact due to paper consumption and hoping to expand their outreach by using social media. Sales per customer have declined in the past year.

Paul owns 60% of the company. Peter and Sid, Paul's children, each own 20%.Paul is chairman of the Board of Directors, but has left the day to day management of the company to Peter and Sid, who disagree on the direction the company should be taking.Sid has recently completed a degree in Communications and Social Marketing and believes that CAP needs to diversify and start providing web design and social media marketing services. Peter is adamant that the company should stick to printing as the company has been very successful and they understand the printing business. Paul agrees with Peter and doesn't understand why the company should diversify. As a result Sid is very frustrated and is considering starting her own communications and social media company. She knows that she will need financing to start the new company so she has been carefully putting aside money in her savings account. As well she is considering selling her interest in the business.She has not told Peter or Paul about her plans.

CAP's printing technology is over 15 years old and has required significant repairs this past year. They may have difficulty finding parts in future as the company they purchased it from has just announced they will no longer support old versions. Peter knows they need to replace it but due to the challenging years the company has faced he does not believe the bank will finance it for them. He asked Paul to lend the company the money but Paul needs his personal funds for retirement so Peter has approached a venture capitalist firm that provides equity financing to small businesses. They have agreed to consider investing in CAP but want to see the 2015 audited statements.

With respect to the day to day management of the company Peter looks after the sales and production. Sid focuses on the accounting and finance. In February 2015 Sid had a dispute with the financial accountant over misogynist comments he made in the office and asked for his resignation. Although the company had never paid severance to employees before, they paid severance of $75,000 to the financial accountant.

Sid approves all of the payables and signs cheques under $10,000.Cheques over $10,000 must also be signed by Paul. If Paul is going to be travelling he will leave blank cheques with his signature on them so Sid is able to meet supplier payment terms.

Typically the board meets quarterly to discuss the strategies and review the financial statements and budget.This past quarterly meeting Sid recognized that they would need time to discuss the financing of the equipment so she suggested that the review of the financial statements be put as the last item on the agenda. Peter agreed as he said he didn't understand most of the stuff in the financial statements anyways. As it turned out, there was not enough time in the meeting to review or discuss the financial statements or the variances from the budget.

The Canadian small literary magazine market had a major shake-up last year as 7 out of the 20 magazines stopped publishing a hardcopy and 3 magazines have closed down entirely. So far none of CAP's literary clients have been impacted.

During this past year there was also significant unrest in the pulp and paper labour force.Several of the major pulp and paper mills were closed during September 2014 through March 2015 due to labour strikes. This resulted in a shortage of paper products in Canada forcing CAP to import paper from the U.S. at higher prices.The unions settled the labour dispute in April and starting in May 2015 CAP was able to start buying from Canadian suppliers at lower prices again. CAP uses FIFO to account for its inventory.

The draft income statement, balance sheet and cash flow statement for the year ended August 31, 2015 and the audited income statement and balance sheet for the year ended August 31, 2014 are provided in the excel file "CAP Printers financial statements".

During your discussions with Sid she indicated she is confident the draft financial statements are accurate except she did note that the bookkeeper had mistakenly recorded $37,000 in sales for a contract that would be completed in September 2015, which the customer had prepaid for in August 2015. Sid said, "To manage our cash we are asking more customers to prepay for their orders."

Note that the cost of goods sold includes the cost of the paper, depreciation on the printing equipment and direct labour costs.

Financial Statements enclosed.

Community Access Printers Ltd

Balance Sheet

August 31,

20152014

Accounts receivable425,000269,333

Inventory 276,350186,350

Printing equipment 720,000695,000

Accumulated depreciation(590,750)129,250(556,000)139,000

Office equipment 85,00085,000

Accumulated depreciation(34,000)51,000(25,500)59,500

$ 881,600$ 654,183

Bank overdraft 561,080375,000

Accounts payable54,61446,588

Income tax payable8,1474,758

Accrued liabilities52,45073,200

676,291499,545

Deferred tax29,70029,700

705,991529,245

Shareholders' Equity

Common shares10,00010,000

Retained earnings165,609114,938

175,609124,938

881,600654,183

Community Access Printers Ltd

Income Statement

for the year ended August 31,

20152014

Sales3,400,0003,232,000

Cost of Goods Sold1,997,1502,100,800

1,402,8501,131,200

Rent expense 144,000144,000

Utility expense 119,900129,600

Administration salaries750,000575,000

Entertainment and travel expense47,00016,000

Interest expense17,16115,000

Repairs and maintenance5,60025,600

Depreciation expense7,5007,500

Delivery expense120,000132,000

1,211,1611,044,700

Profit before tax191,68986,500

Income tax expense32,58719,030

$ 159,101$ 67,470

Community Access Printers Ltd

Cash Flow Statement

for the year ended August 31, 2015

Operating activities

Profit $159,101

Depreciation 42,250

Working capital adjustments

Accounts receivable(155,667)

Inventory(90,000)

Accounts payable8,027

Income Tax payable3,389

Accrued liabilities(20,750)

(53,649)

Investing activities

Printing equipment(25,000)

Financing activities

Dividends(107,431)

Decrease in cash(186,080)

Bank overdraft September 1, 2014(375,000)

Bank overdraft August 31, 2015$(561,080)

Required:

You are the CPA on the audit for Community Access Printers (CAP).

Identify4 accountsthat you believe to have a significant risk of material misstatement.

a)Name the account most likely to be misstated.

b)Provide a relevant case fact that supports why you think the account is likely to be misstated.

c)Look at the financial statements and determine the difference in the account from the prior year. Use any financial ratios you think are applicable. (numerical response)

d)Do you think the account is likely to be understated or overstated? Is there another account related to the account that could also be over/under stated?

e)For the account identified list the audit assertions you would be concerned with.