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This assignment is expected to take you the follow...




This assignment is expected to take you the following time: Internet research ? 3 hours Industry analysis ? 2 hours Completing the checklist ? 1hour Preliminary analysis ? 2 hours You are being asked to complete part of the checklist for the knowledge of a client?s business, as you would do for any new client of your audit firm. It is expected that you will study at least two competitors for the fictional company described below. The case is as follows. Java Stop Limited (JSL) is a private company with corporate offices at 10 Bay Street, Suite 409 in Toronto. It was founded July 2, 2002 by Michael Beber. Mr. Beber was working as a banker at the time. While visiting a client in the import business, his client pointed to the coffee Mr. Beber had bought at the corner coffee shop for $1.75 and told him that the beans to make one cup cost about 20 cents. Knowing that the other main ingredient was water, which was almost costless, Mr. Beber did the math on the other fixed and variable costs, looked at the competition and the market and decided there was room for one more coffee chain. The first store, run by his now ex-wife Lori, opened October 1, 2002. Java Stop distinguished itself from its competitors in three areas. First, they use distilled water instead of tap water. Technically speaking, anything added to tap water is mostly boiled away during the brewing process. Displaying the water jugs to the customers reinforces the image of purity. Surveys have shown this to be a positive feature of their locations. The second advantage was that right from the beginning, free internet was made available to customers. While this is common in the competitors today, it was not as common in 2002. Lastly, Jave Stop prices its products at 90% of the price at the leading chain. When incorporated, 1,000,000 shares were issued. He owned 75% and his wife owned 25%. Mr. Beber and his wife were divorced in 2006, at which time there were 7 locations in Toronto, and one in Kingston. After their divorce settlement, Lori owned 200,000 shares, Mr. Beber 400,000 and a family trust had 400,000. The family trust was set up to benefit the couple?s two children. Mr. Beber quit the bank in 2006 to run the company full time and it now has 23 locations. Lori ceased to be involved in operating the company in 2005. The current management team is composed of Kathy Kus, CFO, Hy Haberman, V.P. Operations and Michael Beber, CEO. All three sit on the Board of Directors along with four others who are mostly friends of Mr. Beber. There are several challenges faced by the company. The first is that within the next five years, it is planned to change their incorporation from the Ontario Corporations Act to the Federal Canada Corporations Act. While not necessary in order to expand into other provinces, it will make it easier to expand into the United States. At the same time, the company is expected to go public and use the funds to expand rapidly. It is for this reason that they have chosen to have the financial statements audited. Because of Mr. Beber?s contacts at the Bank of Nova Scotia, 100 Yonge St., 9th floor Toronto ON, M5H 1H1, operating lines of credit were secured by a general charge on assets and internally prepared financial statements were deemed to be acceptable. No review or audit has been done in the past. Ms. Kus is a CA with 20 years experience and there six employees in the accounting department, including the Accounting Manger, Joan Zhou, who recently completed her CGA. They are currently using ACCPAC v 5.4 operating on a Dell Data Server. JSL outsources its IT services to FC DataNet, Limited which is headquartered in Calgary and has offices across Canada. Ms. Kus believes this system will be scalable up to 100 locations, at which time it is likely the company will bring its systems in house and upgrade to a larger software platform such as SAP. Ms. Kus is familiar with SAP through her work as Controller for Nabisco Canada prior to joining JSL. There is only a small chance that JSL will have that many locations by the time it goes public. The last challenge to the business is what to do with its coffee import operations. JSL uses its buying power to buy beans and roast them on behalf of smaller coffee shops. This helps use up capacity at its own roasting plant but also helps strengthen its competitors and has a low gross margin of less 15% even though there is no extra operating costs.. Roughly 20% of sales come from the roasting side of the business. It also accounts for all of the accounts receivable. The year end is December 31. Required a) (10 marks) Fill out the client acceptance checklist. This will require you to do research on the coffee shop industry. You may wish to contact the library if you need help with research. Feel free to expand the Knowledge of Industry section to have enough room to give the results of your research. b) (8 marks) Perform a preliminary analysis of the financial information. c) (4 marks) Calculate materiality based on the information you?ve been given and justify your calculation. d) (8 marks) Identify four areas of inherent risk that might affect your audit planning. Would you say these are high risks or low? KNOWLEDGE OF THE CLIENT'S BUSINESS CHECKLIST This appendix provides a checklist that may help the auditor obtain and document knowledge of some of the characteristics of the client's business. This checklist is not meant to be an exhaustive list of the characteristics of the client's business that may be important for the audit. In addition, this checklist is not designed to group all of the information necessary for understanding internal control for planning purposes and assessing control risk. I. KNOWLEDGE OF THE ENTITY A. CHARACTERISTICS OF OWNERSHIP AND MANAGEMENT 1. Type of entity: 0Corporation 0 Sole proprietorship 0Private 0Public 0 Joint venture 0 Crown corporation 0 General partnership 0 Not-for-profit organization 0 Limited partnership 0 Other (describe) 2. Jurisdiction of incorporation: Statute: Date: 3. Listed on stock exchange: (name of stock exchanges, listed securities) 4. Principal owners, directors and officers: Name Title % interest I. KNOWLEDGE OF THE ENTITY B. OPERATIONS 1. Nature of activities (manufacturing, distributing, service, etc.; industrial, commercial, residential, individual, etc.): Description of products and services % of activities 2. Territory covered Location % of activities 3. Production or sales cycles 4. Patents, trademarks, rights, permits: I. KNOWLEDGE OF THE ENTITY C. FINANCIAL POSITION 2. Sources of financing: Financial institutions (name, address, bank accounts) Other sources of financing: 3. Is there a doubt as to the entity's ability to continue as a going concern? D. INFORMATION SYSTEMS 1. Accounting records and documents: Accounting cycle or subsystem System or software Frequency 2. Description of computerized system: II. KNOWLEDGE OF THE INDUSTRY 1. Economic conditions of the industry: (market conditions, decline or expansion of business, price changes, economic cycle of products, etc.): 2. Description of technological changes, internationalization of business transactions and their effects on the market: 3. Major competitors: Name Products or services offered 4. Financial statement users and reporting requirements: 5. Specific knowledge required of the audit team: Type of knowledge Description Canadian accounting standards US accounting standards Other accounting standards Specific industry guidance Materiality: Materiality should be calculated as: This amount is appropriate for the following reasons:,Hi, I just too much things to do nd need help.


Paper#10027 | Written in 18-Jul-2015

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