You are an experienced staff accountant with Hodges, Jones & Gentry (the Firm) and have been assigned to work on the audit of RB Johnson Electric Company (the Company) as of and for the year ended December 31, 2022. The Company, which is engaged in electrical construction, has been a long-time client of the Firm.

This is a large entity, and the audit will be conducted by a team of individuals, including the engagement partner, Toby Jackson, the engagement quality reviewer, Greg Tower, the engagement manager, Rebecca Stewart, and five staff, including you. You are the senior most staff on the engagement and you will aid the other staff as needed.

Sam and Barry Johnson, who are brothers, own (equally) all of the outstanding stock of RB Johnson Electric (the Company), an electrical contractor headquartered in Charlottesville, Virginia. The Company was founded by the current owner's father in December of 1947 and has been in continuous operation since that date. The Company performs commercial electrical construction for major construction projects on the East Coast of the United States and has offices, in addition to its Charlottesville, Virginia office, in Richmond and Vienna, Virginia, Raleigh and Charlotte, North Carolina, Columbia and Charleston, South Carolina, and Tampa and Orlando, Florida. The Company employs in excess of 1,000 people and for its most recent year ended December 31, 2021, had in excess of $600 million in contract revenues.

Sam and Barry joined the Company just prior to their father’s retirement and since that time the Company has enjoyed enormous growth and prosperity. In addition to being in a position to take advantage of the last 15 years of steady economic growth, the Company has certain patented technology for energy management for commercial buildings.

You recently attended a meeting with the Company’s management and owners that included the engagement partner, Toby, and the engagement manager, Rebecca. This meeting was a part of the 2022 planning process and included a review of the Company’s interim financial statements as of and for the period ended July 31, 2022. Although the Company continues to be profitable, the Company’s backlog is beginning to decline, and the owners of the Company do not believe that commercial construction will continue at the pace it has been for the last 15 years. Condensed financial statements of the Company as of and for the seven months ended July 31, 2022, are as follows.

Balance Sheet

July 31,2022 and 2021

Cash 575,000 4,575,000

Accounts receivable 4,200,000 2,500,000

Cost in Excess of Billings 3,100,000 2,275,000

Current Assets 7,875,000 9,350,000

PPE,net 8,500,000 9,000,000

Goodwill 3,500,000 3,500,000

Total Assets 19,875,000 21,850,000

Accounts Payable 1,500,000 1,000,000

Line of Credit 13,000,000 12,000,000

Billings in excess of cost 275,000 5,250,000

Total Liabilities 14,775,000 18,250,000

Common stock 3,000,000 3,000,000

Retained Earnings 2,100,000 600,000

Total Equity 5,100,000 3,600,000

Total Liabilities and equity 19,875,000 21,850,000

Income Statement

Seven month ended July 31 2022 and 2021

Revenues 420,000,000 675,000,000

Cost of Revenue 396,000,000 627,750,000

Gross Profit 24,000,000 47,250,000

SGA 22,500,000 20,750,000

Net Income 1,500,000 26,500,000

Cash Flow Statements

Seven Months ended July 31 2022 and 2021

Net Income 1,500,000 26,500,000

Depreciation 500,000 500,000

Increase in accounts receivable (1,700,000) 2,500,000

Increase in cost in excess of billings (825,000) 275,000

Increase in accounts payable 500,000 280,000

Decrease in billings in excess of cost (4,975,000) (28,480,000)

Operating cash flows (5,000,000) 1,575,000

Cash flows from borrowings 1,000,000 0

(Decrease) Increase in cash (4,000,000) 1,575,000

Cash Beginning of Period 4,575,000 3,000,000

Cash End of Period 575,000 4,575,000

Additional information developed during your meeting with management included the following:

• The Company has just been notified of a patent infringement lawsuit initiated against the Company relative to its energy management software. The suit demands the Company stop the sale and promotion of the product until trial.

• The Company is in the process of renegotiating its line of credit agreement with Truist Bank and its bonding program with Liberty Mutual.

• The Company’s goodwill (which is not amortized) arose in connection with the Company’s acquisition of a company that installs the Company’s patented energy management software.

• The Company’s results for 2022 have been significantly impacted by a project in NYC. This project, which was originally bid with an 8% margin has been significantly impacted by the Company’s inability to properly staff the project. This is the Company’s first project in NYC and its first experience with unionized labor. The Company has prepared a change order request, which ownership expects will “make the project whole.”

• Recently, the Company was notified of the bankruptcy of an entity that until just recently owed the Company $2,000,000. This amount was, fortunately, paid in full in early August, but the Company has recently received communication from the bankruptcy court regarding preferential payment. The Company’s attorneys are looking into this matter.

Just as you were leaving the meeting, the long-time CFO of the Company followed you and the engagement team to your car and announced that he had decided to take early retirement. He was disappointed that ownership did not talk about this during your meeting. The CFO also told you that his early retirement was completely unrelated to the Company’s business but instead related to his wife’s health.

Required

Based upon the information developed in the Company planning meeting and the Company’s interim results through July 31, 2022, prepare a listing of information that you believe should be discussed, based upon their potential impact on the Company’s 2022 audit plan, in the engagement team planning meeting.

Answer rating: 100% (QA)

There are several potential audit risks that you should consider in the audit of RB Johnson Electric ... View the full answer