Goal Products Limited (GPL) is the official manufacturer and distributor of soccer balls for the North American League Soccer (NALS), a professional soccer association. GPL was founded 15 years ago and became a Canadian publicly traded company on July 1, 20X1. GPL has one plant in Canada, and it has one in the U.S. that is operated through a subsidiary of GPL.

It is now October 20, 20X3. You, PA, were recently hired as the manager of financial reporting for GPL. In your first week, you must review the first draft of the quarterly reporting package and provide comments to the financial reporting team on any issues you note. As you start your review you receive an email from the chief financial officer,

Joey Bonaducci (Exhibit DC16-6 –1).

EXHIBIT DC16-6–1

Email from Joey Bonaducci

Hi PA, before you start on reviewing the quarterly reporting packages, we need to prepare a response to the management letter we received from the external auditors for the year ended June 30, 20X3, for presentation at the next audit committee meeting next week. Sandra Dee, who is responsible for GPL’s internal audit work among her many other duties, has looked into the issues and prepared our responses (Exhibit DC16-6–2). Please review the draft report prepared by Sandra and make sure the auditors will be satisfied with our response.

Joey B.

Required:
a. Take on the role of PA in the case, and comment on the general process being used by GPL to prepare the responses to the external auditor’s management letter and bring them to the audit committee.
b. In the role of PA in the case, assess the adequacy of the internal auditor’s work and responses. State your conclusions on whether Sandra’s responses will be satisfactory to the external auditor.
c. Take the role of the external auditor in the case. Discuss what impact the weaknesses, if not addressed, will have on planning the audit engagement for nextyear.

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EXHIBIT DC16-6-2 Auditor's Management Letter Excerpts and GPL's Internal Audit Department Responses PA, I'm sure you will agree with my conclusions once you read the details below. Let me know, though, if you think we need to implement any new controls. Based on the procedures I performed and those performed by the external auditors at year-end, and the fact that they did not note any material differences, our existing controls are considered adequate. Sandra Dee, GPL Internal Audit Manager MANAGEMENT LETTER ISSUE Capital asset software ISSUE RAISED BY EXTERNAL AUDITOR INTERNAL AUDIT TESTING AND RESPONSE We identified several deficiencies in our review performed my own test of reasonability. There and evaluation of amortization processes. A software program calculates an amortization amount on a monthly basis, which is then recorded as a journal entry directly to the general in the system and those used in my reasonability ledger. However, the program has not been reviewed to ensure additions and deletions are recorded properly and amortization policies are applied appropriately. Due to recent staffing changes, current staff members have inadequate knowledge of the software. were minimal acquisitions during the year ended June 30, 20X3. Any variances resulted from differences between the amortization rates used tests. The variances were immaterial. EXHIBIT DC16-6-2 Continued As a result, the software is no longer tracking the detailed cost build-up of individual assets for acquisitions. Only the final costs of assets are known. Also, there is no process for completing a reasonability check of the balances. Sales contract monitoring We identified deficiencies in management's sales contract process again this year. There is no monitoring process to ensure sales contracts are adequately authorized and nonstandard contracts are reviewed and approved by authorized personnel. As a result, not all contracts were approved or reviewed, and in some cases no final versions of contracts could be found I performed a test of details on a few of our current contracts, and everything was fine Sales contract monitoring In addition, there is a lack of segregation of duties. The person maintaining the contract files is also responsible for making deposits and doing bank reconciliations. Since there are insufficient controls for contract approval and modification this person could modify contracts and deposits to disguise fraud. Only one person within the organization is responsible for the internal audit procedures, and that person does not possess a recognized designation. Also, that person spends a significant amount of time performing other duties, so has little time to dedicate to internal audit responsibilities Unfortunately, the accounting department is short staffed. Nothing can be done to address the segregation of duties issue Internal audit Well, yes, I am very busy. But I have always been able to fit all my assigned duties into the work week. Consolidation procedures The Canadian and U.S. companies are consolidated using a large spreadsheet that is maintained solely by the accounting manager Modifications have been made to the spreadsheet, and as a result, small differences are recorded in retained earnings. No formal process is in place to verify the accuracy of the spreadsheet. I examined the spreadsheet last year, and it was fine. We have always adjusted for the differences because they are not material enough for us to spend more time on them