I am struggling with materiality (Q4 and Q5) as well as analytical procedures
Brandon University Auditing – 16:355 Winter 2022 Project (10% in total) Part 1 (questions 1-5) due: Tuesday, March 1, 2022 Part 2 (questions 6 and 7) due: Tuesday, March 15, 2022 This assignment must be completed and handed in or emailed to me (
[email protected]) by 4:30 P.M. on the due date. I will respond to let you know your email has been received. Assignments submitted late will not be marked. Vantage Point Salon Vantage Point Salon (Vantage) is a hair salon owned and operated by Amanda. Amanda had worked as a hair stylist in a high-traffic salon in the Brandon Shoppers Mall for over 10 years. On January 1, 2021, she decided that the time was right to open her own salon, so she took out a loan for the initial costs of setting up her salon. Over the last year, the salon’s business has grown so much that Vantage has extended their hours to include evenings and all weekends. Amanda has hired one full-time and two part-time hair stylists, as well as a part-time receptionist who helps manage the front desk. In addition, a masseuse operates her own company, Relaxation Inc. (Relaxation), in a room within the hair salon. Relaxation is a totally separate legal entity from Vantage. As the hair salon premises are being fully used and the salon’s clientele is continuing to grow, Amanda is hoping to expand her storefront and is looking for an additional loan from Sunrise Credit Union (Sunrise) to do this. Sunrise requires audited financial statements for Vantage for the fiscal year ended December 31, 2021. Vantage follows ASPE and the draft income statement for the year ended December 31, 2021 is included in Appendix A. In January 2022, Amanda approached Lindsay, a CPA, to inquire whether her firm could complete the audit. Lindsay is one of four partners at the firm and Amanda has been Lindsay’s hair stylist for many years. They are close friends and have many mutual friends. During the course of 2021, Amanda has asked Lindsay for her opinion on some accounting issues, such as the correct accounting treatment for Vantage’s expenditures and has implemented some of Lindsay’s recommendations. Amanda uses an off-the-shelf software package that is used by many salons. The software package allows for easy input of sales transactions. As a sale is made, it is automatically recorded in both the sales subledger and the general ledger. The software is able to generate reports by customer name and by type of service although Amanda has been too busy to do this. Amanda uses a laptop to track Vantage’s operations and is hoping to replace it soon as it keeps crashing. Amanda is a skilled hair stylist and very charismatic but will be the first to admit that she has a lot to learn about running her own business. She is prompt at paying bills and waits until invoices are paid before recording them. Lately she has been so busy that bank deposits don’t get made for up to a few days at a time. Appendix B shows extracts from the monthly income statements from September to December 2021. Appendix C includes notes from Lindsay’s meeting with Amanda and Appendix D is a memo that Amanda has prepared to describe the sales process at Vantage. Required: 1) Identify any threats to independence that would prevent Lindsay’s accounting firm from accepting Vantage Point Salon as an audit client. Discuss how each threat could impact independence and how, if at all, the firm can mitigate each threat. (7 marks) 2) Perform planning analytical procedures on Vantage’s revenues. Use the information provided in Appendix D, and distinguish between full-time and part-time revenues. Which accounts and related assertions are you most concerned about after your analytical procedures. (15 marks) 3) Discuss whether or not there is any evidence of the possibility of fraud occurring at Vantage. What is the auditor’s responsibility with regards to detecting fraud at Vantage? If fraud did occur, what steps should the audit firm take now? (10 marks) 4) Conclude on the overall risk of material misstatement (ROMM). Support your conclusion by discussing at least seven risk factors and indicate which type (inherent risk or control risk) of risk each factor is associated with. (8 marks) 5) Calculate overall planning materiality and performance materiality for the December 31, 2021 year end audit. Provide support for your conclusions. (9 marks) 6) Identify nine different risks at the assertion level. For each risk, identify a substantive audit procedure (analytical procedure or test of details) and the audit assertion that is being tested. (27 marks) 7) Amanda has asked for some business advice related to internal controls. Describe eight weaknesses in Vantage’s business processes, explain the implications of weakness, and provide a recommendation to reduce or eliminate each weakness. (24 marks) Note: I would suggest setting up your responses to questions 6 and 7 in a table format. Appendix A: Draft income statement for the year ended December 31, 2021 Vantage Point Salon Statement of Earnings for the year ended December 31, 2021 Notes Revenues - full-time staff 212,150 Revenues - part-time staff 30,300 Product sales 13,825 Total revenues 256,275 Cost of goods sold 8,485 1 Products used in services 4,828 2 General and administrative 7,547 3 Wages expense 79,771 Interest expense 1,554 4 Rent expense 9,000 5 Total expenses 111,185 Total income before taxes 145,090 Notes: 1) This includes hair products purchased from Beauty Supplies, which Vantage normally sells to customers at a 50% markup. 2) Products used in hair services are mostly made up of hair colour, shampoo and conditioner. Sometimes a client will need two colour treatments, depending upon their hair length and type of colour method. 3) Amanda used $5,000 of her own money to purchase new lights, painting and supply cupboards for the salon, which is included in general and administrative expense. Sometimes she uses her own personal credit card to buy supplies for the business and then takes money out of the cash register to reimburse herself for these purchases. She keeps the receipts for these items in a separate envelope. 4) Interest expense relates to the $100,000 loan that Amanda took out to finance the initial costs of setting up the salon. The loan must be paid back over five years. The covenants on the loan require a current ratio of 1.5:1 and a debt-to-equity ratio of 1.2 to 1. If these covenants are not maintained the loan becomes due on demand. 5) Vantage is required to remit 5% of its gross sales to the lessor in addition to a monthly rental amount of $1,000. No amount has been recorded for the gross sales yet as it will be done when the financial statements are finalized. Appendix B: Extracts from monthly financial statements September October November December Revenues - full-time staff 17,450 17,700 17,500 17,350 Revenues - part-time staff 7,200 8,500 7,600 7,000 Product sales 1,000 1,300 900 800 Total revenues 25,650 27,500 26,000 25,150 Cost of goods sold 700 910 630 560 Products used in services 399 557 337 285 General and administrative 247 342 378 457 Wages expense 9,224 9,224 9,224 9,224 Interest expense 125 118 145 154 Rent expense 1,000 1,000 1,000 1,000 Total expenses 11,695 12,151 11,714 11,680 Total income before taxes 13,955 15,349 14,286 13,470 Appendix C: Notes from Lindsay’s meeting with Amanda in January 2022 Vantage employees consist of Amanda, Rayna, who is another full-time stylist, and three part-time employees: Calista, Eve, and Mya. There is one full-time masseuse named Roxy, who operates her business (Relaxation) within Vantage. Roxy is not on Vantage’s payroll as her business is a separate legal entity and is owned 100% by herself. Relaxation shares a cash register with Vantage. Roxy rings in services and products sold using a certain code to distinguish her sales from Vantage’s sales. Amanda and Roxy have a verbal agreement that Vantage will collect 20% of Relaxation’s revenue instead of charging rent. Amanda receives this amount in cash and does not record it in her books and records. There seems to be some tension between Amanda and Roxy. In September of 2021, Calista and Eve had come to Amanda looking for employment. They were both hired on the spot because Amanda felt they had the right “look”. Because Amanda was so excited about not having to search for hair stylists, she did not ask them for their Cosmetology Association member numbers to verify that they were both licensed. Calista and Eve are best friends and told Amanda that they had just graduated from The Salon Professional Academy in Winnipeg and they were eager to work for Amanda as they were from the area and had big student loans. They always seem to have lots of friends in the store, and Amanda is hoping this will lead to a new, younger, clientele base. Amanda had always answered the phones and booked appointments herself until the end of October 2021 when she hired Mya to take on this role. When clients book an appointment, it is entered into a master schedule, which is maintained electronically so that a historical record is available for each client. Amanda has been so impressed with Mya that she has tasked her with doing the bank deposits and handling client transactions when their services are complete. All Vantage employees have access to process the salon’s payment transactions so they can help out when Mya is busy. This helps ensure that customers are not kept waiting after their services are complete. As well, Roxy often processes payment transactions for Vantage’s services and product sales since her business is new and often, she is not busy. Similarly, Mya will sometimes process Relaxation’s transactions when Roxy is busy. Amanda requires a loan to expand Vantage’s storefront location. Vantage is currently in a three-year lease and Amanda is not happy with the amount of rent that Vantage is being charged. Rent is equivalent to 5% of Vantage’s monthly sales in addition to $1,000 per month. The lessor had provided an upfront incentive of free rent for the first three months because there had been some