You work for the public accounting (audit) firm of Teper and Lubetsky. You have been approached by Edouard Inc. to be its auditor for the 2020 fiscal year. Edouard Inc. is a medium sized company operating in Southern Ontario as a merchandise wholesaler, buying goods to sell to retailers. [For this assignment, ignore issues related to communication with prior auditors] You will review the draft financial statements found on the next page as you prepare for audit planning. In addition, upon an inquiry, you discover the following three facts about Edouard Inc.: Company management has been known to have many disputes with suppliers. Management appears to have been under-paying for goods received despite clear evidence (emails and written documents) outlining amounts owed to suppliers. This unethical business practice is a concern and is well known in the industry. The company has two shareholders, and each of them is intimately knowledgeable of company financial and operating affairs. These two shareholders often speak directly to the Senior Management team. In fact, the holder of all of the companys Bonds (see Liabilities section of the Balance Sheet) is one of these two shareholders. The company has a very predictable and repetitive set of transactions each month. All suppliers of inventory are within Canada and are paid in Canadian dollars, and therefore there is no complexity related foreign exchange transactions. Required: a) Using the three facts discovered upon inquiry (see above), evaluate these facts and come to a decision as to whether Teper and Lubetsky should or should not accept the audit engagement. Justify your decision using the three facts and balancing the Pro and Con arguments. [10 marks] b) Assuming you accept the audit engagement, use the draft 2020 financial statements to evaluate Edouard Inc.s: i. Liquidity by calculating the 2020 Current Ratio and Quick Ratio (also known as Acid Test) compared to the industry standard of a Current Ratio of 1.8 : 1 and Quick Ratio of 1.4 : 1. [5 marks] ii. Collectability of the 2020 net Accounts Receivable using 2019 as a reasonable basis. [5 marks]

Note: Use the following definitions for the purposes of this assignment Current Ratio = Current Assets / Current Liabilities Quick Ratio or Acid Test = (Cash + Net Receivables) / Current Liabilities

Financial Statements for Edouard Inc. Balance Sheet in s Edouard Inc. For the Year ended Dec. 31, 2020 5,400,000 3,390,000 ASSETS: Edouard Inc. Income Statement As at Dec. 31, in $ 2020 2019 Net Sales Cost of Goods Sold 574,000 490,000 Gross Profit 288,000 240,000 (7,000) (10,000) Operating Expenses: 246,000 265,000 Administrative Expenses 1,101,000 985,000 Other Operating Expenses Depreciation, Buildings Current Assets: Cash Accounts Receivable (Gross) less Allowance for Doubtful Accounts Inventory Total Current Assets 2,010,000 680,000 670,000 300,000 Total Operating Expenses 1,650,000 Non-Current Assets Land Buidings (net of Accum. Depr.) Total Non-Current Assets 790,000 1,800,000 2,590,000 790,000 2,100,000 2,890,000 Operating Profit 360,000 TOTAL ASSETS 3,691,000 3,875,000 Income Tax Expense 144,000 Profit 216,000 LIABILITIES: Current Liabilities: Accounts Payable Bonds Payable (current) Total Current Liabilities 539,000 50,000 589,000 801,000 50,000 851,000 Non-Current Liabilities Bonds Payable Total Non-Current Liabilities 500,000 500,000 550,000 550,000 TOTAL LIABILITIES 1,089,000 1,401,000 EQUITY: Common Shares Retained Earnings TOTAL EQUITY 1,624,000 978,000 2,602,000 1,624,000 850,000 2,474,000 TOTAL LIABILITIES & EQUITY 3,691,000 3,875,000