(SGI) owns and operates a chain of six grocery stores located through-out Nova Scotia. The stores are located in rural communities and SGI’s head office is located in Halifax. Because SGI stores provide jobs within small, rural communities and SGI’s head office has a policy of employing individuals coping with mental and physical disabilities, SGI receives some grant funding from the Nova Scotia Department of Com-munity Services (DCS). DCS requires that SGI’s financial statements be audited each year. Details of the grant funding agreement between SGI and DCS are included in Exhibit 1. You have been the auditor of SGI for many years and have a good working relationship with SGI’s sole shareholder, Steve Marcus. You admire Steve’s integrity and commitment to improving his community and are impressed with how SGI’s corporate culture reflects Steve’s core values. You recently met with Steve to discuss the upcoming audit for the year ending 28 February 20X9. Notes from your meeting, which took place on 25 March are as follows:
• Steve hired a new manager of accounting in November 20X8. Marci Lucas is a professional accountant and is now in charge of accounting and finance for SGI. Marci has already made some year- end adjustments to the financial statements so that everything is in good shape for the visit from the auditors. (These journal entries, which include Marci’s supporting notes, are in Exhibit 2.)
• Steve, who knows little about accounting, has recently been taking an on- line accounting class to help him develop a basic understanding of GAAP and financial reporting requirements. He is currently learning about accounting for bad debts and thinks that SGI should switch to the allowance method. He knows that the direct write- off method has been used in the past and is surprised that you (as his auditor) have signed off on it, since this method is not recommended per GAAP. He would like you to explain your position on this issue.
• Steve is in the process of designing a bonus plan for SGI employees. The bonuses paid will be based on earnings of SGI. The tentative bonus calculation will call for all earnings before taxes and bonuses in excess of $ 100,000 to be paid out as bonuses. The first bonus will be based on next year’s reported earnings before taxes and bonuses ( i. e., earnings for the year ending 28 February 2010.) Steve believes this calculation will result in a generous bonus pool, since SGI’s earnings before taxes historically averages $ 200,000 – $ 250,000.
Prepare a memo to your client analyzing any financial reporting and other issues you identify. Identify any additional information you will need from your client to resolve these issues.