You, CPA, have just started in the internal audit department of Pleasant Pasta Corporation (PPC) after obtaining your CPA designation. PPC is a national grocery store chain. Your first assignment relates to one of PPC's franchisees, Pleasant Pasta Windsor Inc. (PPW). PPW opened in 20X0 as a full service grocery store in the suburbs of Windsor, Ontario. You met with your supervisor at PPC, Justin Trump, on February 1, 20X2. You were advised that your next assignment, at the end of that week, was to visit PPW with the objective of assessing the accounting policies it has adopted and the controls, including IT controls, it has implemented. This review of accounting policies and internal controls is part of the services provided to franchisees by PPC as part of the ongoing franchise relationship. Following your visit, you are to prepare a preliminary report to the Chief Internal Auditor at PPC and PPW management identifying any internal control concerns and recommending areas where additional work may be necessary. When PPW was advised you would be visiting, it requested that you identify accounting considerations for its current fiscal year to help it prepare for its first external audit. Therefore, your report should include your evaluation of the accounting issues for PPW as well . At the meeting, Justin provided you with preliminary information about PPW. PPW has only one bookkeeper and is managed by the owners, Sara and Craig Gamache. Sara and Craig each own 50% of the common shares of PPW and the company qualifies for the small business deduction for income tax purposes. Based on an analysis of PPW's internal monthly financial statements at December 31, 20X1, total sales for the fiscal year ended March 31, 20X2 are expected to reach $4.4 million. PPW adopted Canadian Accounting Standards for Private Enterprises (ASPE) as of April 1, 20X0. You spent two days - February 3 and 4, 20X2 - at PPW obtaining information and conducting preliminary testing. The information you obtained during your visit is summarized in Exhibit I.l. PPW's accounting policy for inventory: Inventory is valued at the lower of cost (determined using the FIFO method) and net realizable value. During the past year, the Gamaches noticed many problems with the computerized checkout pricing system required to be used in the stores throughout the Pleasant Pasta chain. In an unreasonable number of situations, items which were advertised at sale prices in the chain's weekly yers were not adjusted to those prices in the weekly price updates contained in a data le sent to the store by email from the chain's head ofce. Consequently, when customers' purchases were scanned at the checkout, the wrong prices were charged. As PPW is part of the \"Scanning Code of Practice\" found at almost all grocery stores, it had to give these mispriced products free to customers who noticed the errors until the price designated in the software was corrected. In scal 20X2, to date, the Gamaches estimate that inventory costing $25,000 (with a retail value of $36,000) has been given away free due to these errors. The Gamaches want a reserve of $36,000 to be deducted from the actual inventory on hand at March 31, 20X2 as a reection of future losses in net realizable value from these continuing software pricing errors. To encourage shopping during the post-New Year's period, PPW is having a contest that runs from January 2 to March 31, 20X2. This contest involves a draw from customer entries from which ten winners will each get a ve-minute shopping spree. From this spree they will win as many groceries as they can load into a maximum of two shopping carts in the allotted ve minutes. The contest winners will be drawn at 9:00 pm. on March 31, 20X2 and may choose to take their spree any time from April 1 through December 31, 20X2. 4. When the PPW store opened, it had a policy that all baked goods within two days of their \"best before\" date would be removed from the regular product shelves and sold in a discount bin at 50% of the normal retail price. After a year of this policy, Sara and Craig found that few discounted items were being purchased and that most of these items were being thrown out at their expiry dates. In September 20X1, PPW changed its policy regarding these items so that at two days before expiry the items are donated to the local Food Bank. Sara has kept track of these donations and, to date, they have a total cost to PPW of $12,000 with a retail value of $16,000. No adjustments have been made to the inventory records to relieve these items. No documentation has been received from the Food Bank regarding these donations. Notes Arisingom Visit at PPW 5. During the past year, PPW hired eight students studying retail meat cutting through the co-op program at St. Clair College. As the employment of these students satised the work term requirements of their program, PPW is entitled to an Ontario Co-operative Education Tax Credit (CETC) of 25% of the wages paid to the students (since PPW's total wages are more than $600,000) up to a maximum of $3,000 per student per work term. Each student was employed for one four-month work term during the year and each was paid $12,500 during their period of employment. 6. After its initial year, the Gamaches found that PPW's customer parking area was too small to handle the number of customers who shop during peak times. As a result, in May 20Xl, PPW purchased an adjacent property to expand PPW's parking lot. The property cost $275,000 and includes a 50 year-old house that had previously been occupied by a family. The Gamaches planned to demolish the existing house. The estimated value of the land portion of the property assigned by PPW's real estate agent is $125,000. It is estimated that it will cost $25,000 to demolish the house and a further $20,000 to pave the land for its intended purpose as a parking lot. The purchase of this adjacent property was nanced using the company's operating line of credit. Consequently, PPW is now under credit pressure, as it does not have short-term bank credit facilities available to cover requirements from short-tenn cash ow uctuations. Therefore, the Gamaches have applied for a term loan and the bank has indicated it will require audited nancial statements for the March 31, 20X2 scal year. Before demolition started, a problem was discovered. The purchased property had been zoned by the city for residential use only. Only a city zoning change would allow PPW commercial use of the property. The necessary application has been led, but the city council's decision will not be known until June 20X2. Based on written correspondence received by PPW from the zoning department, as well as verbal conversations between the Gamaches and city zoning staff, there is a reasonable (but not denite) chance of the decision being favourable to the Gamaches. However, many neighbours have signed a petition opposing the re-zoning as they do not want an expanded parking lot next to their backyards. Lately, they have been voicing very strong opposition to the idea and are making their intentions very clear to the zoning department. The cost of the re-zoning application was $5,000 and, if unsuccessful, the Gamaches have expressed their intention to rent the property out until it can be sold. In order to be able to rent the property out and maximize resale value, the Gamaches expect that they will need to incur $10,000 in renovation costs. Notes Arisingom Visit at PPW 7. In early December 20Xl, PPW held the rst of what Sara and Craig expect to be annual Christmas parties for all PPW staff and their families. The party was held at a nearby banquet hall with all of the food prepared from store inventory by PPW staff during paid time. The total cost recorded for the party is as follows: Food and non-liquor beverage value (a) $3,000 Food preparation wages (b) 1,500 Liquor purchased (c) 1,000 Entertainment (c) 250 Banquet hall rental (c) 750 $6.500 (a) This is the retail value. Per Sara, when the items were removed from inventory, they were tracked but no accounting entries were made (inventory is physically counted only at year-end). Sara estimates the cost of these items to be $2,500. (b) This amount was included in the normal wages charged to wage expense. (c) These amounts were paid by cheque and charged to staff benet expense. 8. The Gamaches noted that there have been a couple of complaints about low inventory. I tested a sample of 30 and found ve items where the perpetual inventory system showed a quantity greater than 20 but there were no items on the shelf or in the store room. The Gamaches noted that none of these ve items were used for the Christmas party and the items were not perishable goods. 9. In an effort to boost holiday sales in December 20Xl, PPW offered a promotion whereby if a customer purchased $250 in groceries, they received a $25 gift card at the store. The program was met with signicant success and the company gave away $9,000 in gift cards during the month of December. 10. Until now, the bookkeeper has been keeping a set of manual accounting records. The Gamaches expressed a desire to acquire a computerized accounting information system that would be integrated with all other automated systems in the store, especially the computerized checkout, pricing and inventory system supplied by PPC. They are convinced that such a system will allow for better management information and control over nancial reporting. They have asked you for guidance on where to begin and how to proceed, as they have never planned an IT acquisition before