Allan Baker studied pharmacy in University of Toronto. After his…

Question Answered step-by-step Allan Baker studied pharmacy in University of Toronto. After his… Allan Baker studied pharmacy in University of Toronto. After his graduation, he practised as pharmacist for three years at Pharma Plus a franchise operated pharmacy. Allan also had a passion for baking and over the years he took hobby courses at the local college and learned how many techniques to produce wonderful baked goods which he shared with a family and friends.  In 2005, after 3 years of practicing pharmacy he decided to shift his career and follow his passion, he founded The Bake Shop (TBS), a bakery specializing in cakes, pastries, speciality doughnuts and cup cakes.  By 2021, TBS became a well-known bakery in the GTA and expanded rapidly. It now has 2 bakery locations serving local Toronto residents and owns a small production plant. TBS’s production plant services its wholesale grocery and bakery customers who resell the products to retail customers.  Many of TBS’s baked goods can now be found across the GTA in the bakery counters of various well known grocery stores.  To handle the exponential growth, TBS has grown to having over 50 full-time employees and now also has a small sales and finance department. Soon after starting the business Allan Baker, realized he needed help with business management and accounting, this was the area where he had minimal experience.  In 2008, Allan asked his long-time childhood friend Sam Ipp who graduated from Ryerson University with a business degree in 2006 to become a partner in the business.  Since then, Sam has handled all finance and accounting related matters for TBS. Allan owns 52% of the company, 6% is owned by Sam Ipp, 2% is owned by the employees, 40% was originally owned by his father, Brad, who provided Allan money to start the business. Brad was totally hands-off from TBS and let Allan and Sam make all operating decisions. To fund his retirement, Brad recently sold his stake in TBS to a private equity firm.  Allan and Sam are young and ambitious and their dream is to make TBS a public company in five years time. The public equity firm wants to help take the company public so they can also cash in on their returns within the next 5 years. They understand that the key to attracting new investors would be to demonstrate consistent year over year revenue and income growth.Your firm of Burns and Winter  (B&W), CPAs is made up of 100 staff members, including five audit partners. B & W specializes in the audit of retailers. After previously being audited by a different firm, one of the partners of your firm Jim Maskens was recently approached by Sam to conduct the audit of TBS. Jim was a close friend of both Allan and Sam, they grew up together on the same street and spent much of their childhood summers together. Jim moved away when he was 14 years old and had not stayed in touch with Allan and Sam for over 20 years. Recently Sam and Jim reconnected when they bumped into each other at their son’s soccer tournament and within months the three old buddies were best of friends again. Allan and Sam specifically requested Jim lead the audit to help make the whole audit process go smoothly and T&E was appointed to conduct the financial statement audit for the year ending June 30, 2022.         You, a CPA, are an audit manager working at B &W. You have recently completed the audit of Amadeus Company Ltd. (ACL), which is TBS’s main competitor. Because of your experience in auditing companies in the pastry product industry, Jim has asked you to lead the TBS audit.  In the pastry wholesale market, both TBS and Amadeus are highly competitive and keeping “recipe secrets” and production processes confidential is important to ensure their market share is protected.    Jim’s brother recently accepted a job offer from TBS as a sales manager; this role would entitle him to shares in TBS as part of his remuneration package. Since Sam has already shared the draft financial statements with investment bankers, he explicitly stated that he is unwilling to make any changes to the financial statements.As audit manager of the audit, you have made the following notes: Understanding the Entity and Environment TBS owns two stores and one small manufacturing plant all located in the Greater Toronto Area. They have been successful as they offer high-end and unique products that are both sold direct to consumers and wholesale to grocery retailers.  Continued growth of the Canadian economy has TBS hopeful that they can continue to open more stores across other cities across Canada and expand its wholesale sales outside of Ontario.TBS obtained a secured loan from the General Bank in 2022.  TBS is looking to use funding obtained from the bank to expand its operations into other baking products such as bread, candies and ice cream. The loan is secured against TBS’s property, plant and equipment (including it’s manufacturing plant and delivery trucks).  A condition of the loan is that the amount of money borrowed by TBS from the bank cannot exceed its property, plant and equipment balances. TBS has currently borrowed $600,000 from the bank while its property, plant and equipment balances are $1,101,500 (net of accumulated depreciation).  General Bank has requested copies of the audited financial statements as a stipulation for TBS receiving a loan.Based on the courtesy letter reply from the predecessor auditor, you learned that the previous auditor had a disagreement over the revenue recognition method used by TBS. You also learned that previous audits of TBS have taken a substantive approach to the audit as the auditors did not feel controls were operating effectively throughout the year under audit in TBS. With such exponential growth, finance controls were a low priority for Sam and Allan.  Reaching sales targets were top priority and maintaining sound internal control systems was difficult due to the continuously increasing volume of transactions. Other than specific changes to the company’s operation (identified below) no changes were made to TBS processes during the year.You have conducted fieldwork to update your knowledge about both TBS and its industry.  The pastry industry is very competitive and has low margins. Excess food spoilage can have a severe impact on margins. Labour shortages are a common problem in the industry and most large scale bakeries must rely on temporary staffing agencies. Preliminary Analytical ProceduresYou have performed preliminary analytical procedures to identify any unusual balances in the financial statements that require attention. TBS appears to be in good financial condition as assessed from a comparison of the firm’s financial ratios with those of other companies in its industry.  You also noticed TBS is a stable company that is performing well.  TBS makes profit every year. Obtaining an Understanding of TBS’s ProcessesTo keep prices competitive, TBS buys the raw materials (sugar, flour, milk, etc) in bulk. This strategy has mostly worked well except for the few instances when some raw materials expired.TBS also encourages its retail customers to use cash as payment by offering a 5% discount. On average, 60% of its store sales are paid by cash, the remaining 40% are paid by debit or with credit cards.In April 2022 a new program called “Bakery Shop Points” was developed to encourage customers loyalty.  The “Bakery Shop” program features a Bakery Shop privileged customers card (BS card) and is available to all customers. It provides privileges such as discounts, event invitation and sales promotion notices. The BS cards are sold for $20 each and are valid for one year from purchase date. Sam has directed the accounting staff to record the BS card fees as revenue when the cards are sold, even though on preliminary analysis it appears that revenue recognition criteria has not been met at that time. Interview notes of various TBS personnel TBS’s wholesale division, invoices retailers when products are delivered to them with payment terms of full payment in 30 days.  From the aging analysis of the accounts receivable given by TBS’s accounting department, a significant amount of accounts receivable outstanding balances has passed the 60 days period. Various retail customers claim that products were delivered with short shelf life’s, many times with expiry dates of less than 5 days and are refusing to pay the invoice without receiving a credit for this issue. All of TBS’s standard purchase orders provide a guarantee of a 7-day shelf life. Sam explained that due to some labour shortage issues in the plant TBS did deliver product with a 5-day expiry. He is currently negotiating the credit due to the retailers for the issue but stated it will be a negligible amount because over 98% of the goods were eventually sold to end-consumers despite the expiry issue. He has been so busy working the details of their expansion and has not had time yet to meet with these customers to negotiate the credit due.In April, the wholesale division implemented an information processing system.  The Sales Department supervisor informed you that upon initial implementation there were several glitches where some sales were duplicated and included twice or the wrong price was charged for the goods. The issue persisted for over a month and required the sales team to manually review and adjust most sales transactions. They think they caught most of the larger errors but are not sure if there were some smaller errors that have not yet been identified.The Operations Manager in the manufacturing plant informed you that the facility recently underwent an audit by the Canadian Food Inspection Agency (CFIA).  The audit identified many deficiencies the internal control at the plant.  He is considering engaging your firm to review the internal control system and provide recommendations for improvement.Recently one of TBS’s temporary employees filed a claim against TBS. The employee claims that he was severely burned while working in the plant and TBS had not obtained worker’s compensation insurance for him.  The lawyer is hired to defend TBS stated that there is a possibility that the claimant may win the case.  He estimates the claim settlement amount is approximately $100,000.  Sam is afraid that the disclosure of lawsuit will drive away potential investors.  He wants the auditors to keep quiet about this claim. You reviewed a summary of key financial information of TBS as of June 30, 2022. Statement of EarningsUnauditedFor the year endedJune 30, 2022Audited For the year endedJune 30, 2021(audited by another auditor)Revenue  Net sales $3,931,5003,946,000Other income (includes a one-time income of $90,000)94,5000 4,026,0003,946,000Cost and expenses  Cost of goods sold2,742,3502,653,700Selling, general, and administrative expenses977,000920,550Other expenses59,90053,950 3,779,2503,628,200Income before income tax246,750317,800Income tax74,02595,340Net income172,725222,460  Extract – Statement of Financial Position UnauditedJune 30, 2022Audited June 30, 2021(audited by another auditor)Assets  Current Assets$1,417,000$1,462,000Property and equipment (net of accumulated depreciation)1,101,5001,051,400Liabilities  Current liabilities (include bank loan $600,000)1,056,0001,182,500Share Capital500,000500,000 Required: Identify two potential threats to independence for B & W. For each threat, identify the type of threat that exists  and a safeguard to eliminate or reduce the threatUse the following table format for your answer:Situation that causes a threat to independenceType of independence threat (List one only)Safeguard to eliminate or reduce the independence threatIdentify two case facts that impact the risk of material misstatement (inherent risks or control risks) at the overall financial statement level. For each factor identified, indicate if the factor increases or decreases risk, the type of risk (inherent or control) and provide your rational for why the factor increases or decreases risk Identify two case facts that increase/decrease the risk of material misstatement at the account balance and assertion level. For each case fact identified indicate: the account balance and assertion affected, whether the factor increases or decreases risk, the type of risk (inherent or control) affected and provide your rationaleDetermine overall (planning) materiality for TBS’s 2022 financial statement year end audit.   Ensure to include quantitative calculations as well as qualitatively explain why you chose the benchmark and explain the reasoning for the area within the threshold you selected for your calculation.  Show calculations. Accounting Business Financial Accounting ACC 521 Share QuestionEmailCopy link Comments (0)