Northern Frontier Park. Assume that you are an audit senior employed by a highly reputable public...

  
 
 
  

 

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Northern Frontier Park. Assume that you are an audit senior employed by a highly reputable public accounting firm. On May 1, 2019, Ms. Benice, a partner in the firm, invites you to her office to discuss a special engagement that you will be supervising. To ensure the engagement runs smoothly, she has asked you to summarize in a written planning memorandum--all important risks and factors to be considered when conducting the engagement. The client for the special engagement is Northern Frontier Park (NFP), a privately held company that operates a safari-style wildlife park in the northern U.S. Until late last year, NFP had been owned and managed by Mr. Kramer, founder and chief executive officer (CEO). Upon Mr. Kramer's death in 2018, all shares in the company were distributed to his family. Because no one in Kramer's family wants to take over the business, the family will sell 100 percent of the NFP shares at the end of the current fiscal year to Newman, the current controller and chief financial officer (CFO) of NFP. Because NFP is a private company, a market price for the shares is not readily available. Instead, the purchase/sale price will be based on a multiple of the income earned from "ongoing operations" for the year ended May 31, 2019 (Fiscal 2019), calculated using U.S. GAAP. To ensure NFP's reported net income is appropriate, the Kramer family has engaged your firm to provide assurance that the year-end financial statements are reliable and are representative of ongoing operations. In past years, NFP's financial statements always have been prepared by the CFO without audit or review. Similar to wildlife safari parks in Africa, visitors drive through NFP's 3,200-acre park, which is home to over 100 species of native animals, birds and fish. Although hunting is not allowed in the park, fishing is permitted from man-made lakes that NFP constructed and began stocking with fish two years ago. The NFP park has become a popular year-round tourist attraction, with the number of vehicle admissions increasing from 40,000 in 1990 when the park opened to over 55,000 in the 2018 fiscal year. Most of NFP's revenues are earned through park admission and hotel accommodation fees. Each vehicle admitted to the park is charged a $20 entrance fee and approximately one-third of all park visitors stay in NFP's 85-room hotel. With an average nightly rate of $110, hotel occupancy rates typically average 60 percent each year. Most purchases and payments relate to animal and fish acquisition, feeding and medical care, as well as to hotel administration and operations. To assist you in preparing the planning memorandum, Ms. Benice has provided you with unaudited financial statements prepared by the CFO (exhibits 1a and 1b) and other relevant client information (exhibit 2). Upon reviewing this information, you recognize that, because today's date (May 1) precedes NFP's year-end (May 31), only 11 months of operations are included presently in NFP's income statement. Ms. Benice's discussions with the CFO indicate that although the balances on the 12-month income statement will be larger, their relative percentage of revenues (as shown) is unlikely to change. Required: 1. Complete the questions for Part A of this assignment (attached), working individually. 2. For Part B, you will work either individually or as a team of no more than three (3) members to prepare the memo for Ms. Benice described in the case. EXHIBIT 1a Excerpts from the Northern Frontier Park Unaudited Statements of Income and Retained Earnings (000s omitted) Revenues-park admission -hotel rentals -animal sales April 30, 2019 Income before income taxes Income taxes Net income Hotel operating costs Animal feed and care Interest expense Cost of animal sales Depreciation & fish write-offs Restoration and other costs $1,028 1,907 156 3,091 1,328 Dividends Retained earnings, beginning Retained earnings, end 992 198 72 71 162 2,823 268 (80) 188 (173) 264 $279 2019 33.3 61.7 5.0 100.0 43.0 32.1 6.4 2.3 2.3 5.2 91.3 8.7 (2.6) 6.1 111 May 31, 2018 $1,120 2,080 102 3,302 1,451 1,129 89 31 29 10 2,746 563 (167) 396 (280) 148 $264 % 2018 33.9 63.0 3.1 100.0 43.9 34.2 2.7 0.9 0.9 0.3 83.2 17.1 (5.1) 111 65 12.0 EXHIBIT 1b Excerpts from the Northern Frontier Park Unaudited Balance Sheet and Notes to the Financial Statements (000s omitted) Assets Cash Hotel customer accounts receivable Less: Allowance for doubtful accounts Animal and fish stock Capital assets Less: Accumulated amortization Liabilities Accounts payable Accrued liabilities Long-term debt April 30, 2019 Shareholders' Equity Share capital Retained earnings $ 251 403 (70) 659 1,956 (271) $2,928 $ 537 308 1,802 2,647 $2 279 281 $ 2,928 May 31, 2018 $ 120 460 (40) 714 1,942 (235) $2,961 $ 629 155 1,911 2,695 $2 264 266 $ 2,961 Significant Accounting Policies Animal and fish stock: In accordance with industry practice, the stock of fish and animals is reported at the lower of cost or market value. Market values are estimated using current replacement costs. Capital assets: Capital assets include land, man-made lakes, hotel buildings and equipment. Hotel buildings and equipment are amortized on a straight-line basis over their estimated useful lives. In 2019, the remaining estimated useful life of hotel buildings was reduced from 25 to 18 years. Land and man-made lakes are not amortized. Contingent Liabilities: NFP does not routinely collect the scientific data needed to evaluate the ecological health of its park, yet significant growth in visitors over the past 5 years is thought to be damaging park ecology. In 2019, NFP accrued a liability in the amount of $150 (thousand) for possible future environmental restoration costs that may be incurred as a result of deteriorating park ecology. EXHIBIT 2 Other Client Information Beginning the day NFP was founded, Mr. Kramer carefully controlled every aspect of NFP's operations, using his extensive knowledge of veterinary care, marketing, and federal laws and regulations. As CEO, Mr. Kramer was respected by everyone--not only NFP's employees and customers, but also concerned environmental and animal-rights activists. On the financial side, Mr. Kramer worked closely with Newman, Controller and CFO, to design and implement a strong accounting system. All purchases of fish and animals for the park were approved by Mr. Kramer; hotel profitability was reviewed by Mr. Kramer and Newman on a monthly basis; and park admission revenues and cash receipts were compared daily to vehicle counts obtained from monitors installed at the admission gates. A perpetual inventory system was introduced to monitor quantities of fish and animals. The perpetual inventory system was implemented in the current fiscal year to track quantities of fish and animal stock present on the NFP park grounds: NFP personnel easily can track the number of fish released into the man-made lakes, as well as the number of fish caught and removed. Unfortunately, the number of fish births and mortalities are more difficult to track. NFP estimates these numbers based on its prior experience, allowing for possible changes in environmental conditions. Newman has described December 2018 as an unusually harsh winter month and, accordingly, has had to "override" the perpetual system by writing-off significant quantities of fish stock. The writeoff resulted in 20 percent of the December 2018 fish stock balance being charged as an expense on the income statement. In contrast to fish stock, animal stock apparently survived the harsh weather with much greater success. In fact, Newman mentioned that 30 newborn animals survived in 2019, as compared to only 20 in each of the prior three years. Many of these newborn animals were sold to private zoos and other animal parks in 2019; consequently, animal sales revenues have increased in the current year. The growth in successful animal births also has led Newman to reconsider the accounting policy used to record and update animal stock costs. The animal stock account primarily includes costs for adult animal purchases, although some birth-related medical care costs also are included. In the past, these animal costs were assigned to each individual animal using the specific identification inventory method. Newman apparently found that method overly cumbersome, and decided to change to an average cost method for all animals in January 2019. Consequently, when newborn animals now are sold, the average cost of animal stock at the time of sale is used to determine the cost of animal sales to be expensed on the income statement. Northern Frontier Park Part B (20 points) Required: Using all of the information available to you about the Northern Frontier Park engagement in the preceding case, consider the eight (8) audit areas listed below. Identify any areas where additional audit effort will need to be focused to ensure that audit objectives are met. You'll want to highlight any areas that are at greater risk of containing material misstatements or that will require additional audit evidence to ensure that the financial statements conform to GAAP. You may complete this part (Part B) individually, or in a small group of no more than three (3) students. Each student or student group will submit this portion of the assignment using Blackboard (one submission per student group if > 1 student). Use of any materials beyond what I've provided in this document constitutes a violation of the academic honesty agreement. Your task is to submit a brief memo (three pages or less) that summarizes key risks in the audit areas listed below. If possible, try to quantify any differences between what the client has recorded versus what you'd expect based on your knowledge of the client. Your analysis should indicate whether you believe the area/account(s) is likely to contain a misstatement and what the potential misstatement is that causes concern. This is a risk-assessment and audit planning exercise, and you don't have perfect knowledge of the engagement at this stage (nor would an actual auditor!). Your memo should be addressed to the engagement partner on the audit, and assist in identifying areas of concern. Hint: Not all areas may present concerns. Use your judgment and communication skills to help plan an effective audit of this unusual client. Audit areas: 1. Hotel revenue 2. Park admission revenue 3. Accounts receivable & allowance for doubtful accounts 4. Fish stock 5. Animal stock 6. Capital assets & accumulated amortization 7. Accrued liabilities 8. Interest expense Northern Frontier Park. Assume that you are an audit senior employed by a highly reputable public accounting firm. On May 1, 2019, Ms. Benice, a partner in the firm, invites you to her office to discuss a special engagement that you will be supervising. To ensure the engagement runs smoothly, she has asked you to summarize in a written planning memorandum--all important risks and factors to be considered when conducting the engagement. The client for the special engagement is Northern Frontier Park (NFP), a privately held company that operates a safari-style wildlife park in the northern U.S. Until late last year, NFP had been owned and managed by Mr. Kramer, founder and chief executive officer (CEO). Upon Mr. Kramer's death in 2018, all shares in the company were distributed to his family. Because no one in Kramer's family wants to take over the business, the family will sell 100 percent of the NFP shares at the end of the current fiscal year to Newman, the current controller and chief financial officer (CFO) of NFP. Because NFP is a private company, a market price for the shares is not readily available. Instead, the purchase/sale price will be based on a multiple of the income earned from "ongoing operations" for the year ended May 31, 2019 (Fiscal 2019), calculated using U.S. GAAP. To ensure NFP's reported net income is appropriate, the Kramer family has engaged your firm to provide assurance that the year-end financial statements are reliable and are representative of ongoing operations. In past years, NFP's financial statements always have been prepared by the CFO without audit or review. Similar to wildlife safari parks in Africa, visitors drive through NFP's 3,200-acre park, which is home to over 100 species of native animals, birds and fish. Although hunting is not allowed in the park, fishing is permitted from man-made lakes that NFP constructed and began stocking with fish two years ago. The NFP park has become a popular year-round tourist attraction, with the number of vehicle admissions increasing from 40,000 in 1990 when the park opened to over 55,000 in the 2018 fiscal year. Most of NFP's revenues are earned through park admission and hotel accommodation fees. Each vehicle admitted to the park is charged a $20 entrance fee and approximately one-third of all park visitors stay in NFP's 85-room hotel. With an average nightly rate of $110, hotel occupancy rates typically average 60 percent each year. Most purchases and payments relate to animal and fish acquisition, feeding and medical care, as well as to hotel administration and operations. To assist you in preparing the planning memorandum, Ms. Benice has provided you with unaudited financial statements prepared by the CFO (exhibits 1a and 1b) and other relevant client information (exhibit 2). Upon reviewing this information, you recognize that, because today's date (May 1) precedes NFP's year-end (May 31), only 11 months of operations are included presently in NFP's income statement. Ms. Benice's discussions with the CFO indicate that although the balances on the 12-month income statement will be larger, their relative percentage of revenues (as shown) is unlikely to change. Required: 1. Complete the questions for Part A of this assignment (attached), working individually. 2. For Part B, you will work either individually or as a team of no more than three (3) members to prepare the memo for Ms. Benice described in the case. EXHIBIT 1a Excerpts from the Northern Frontier Park Unaudited Statements of Income and Retained Earnings (000s omitted) Revenues-park admission -hotel rentals -animal sales April 30, 2019 Income before income taxes Income taxes Net income Hotel operating costs Animal feed and care Interest expense Cost of animal sales Depreciation & fish write-offs Restoration and other costs $1,028 1,907 156 3,091 1,328 Dividends Retained earnings, beginning Retained earnings, end 992 198 72 71 162 2,823 268 (80) 188 (173) 264 $279 2019 33.3 61.7 5.0 100.0 43.0 32.1 6.4 2.3 2.3 5.2 91.3 8.7 (2.6) 6.1 111 May 31, 2018 $1,120 2,080 102 3,302 1,451 1,129 89 31 29 10 2,746 563 (167) 396 (280) 148 $264 % 2018 33.9 63.0 3.1 100.0 43.9 34.2 2.7 0.9 0.9 0.3 83.2 17.1 (5.1) 111 65 12.0 EXHIBIT 1b Excerpts from the Northern Frontier Park Unaudited Balance Sheet and Notes to the Financial Statements (000s omitted) Assets Cash Hotel customer accounts receivable Less: Allowance for doubtful accounts Animal and fish stock Capital assets Less: Accumulated amortization Liabilities Accounts payable Accrued liabilities Long-term debt April 30, 2019 Shareholders' Equity Share capital Retained earnings $ 251 403 (70) 659 1,956 (271) $2,928 $ 537 308 1,802 2,647 $2 279 281 $ 2,928 May 31, 2018 $ 120 460 (40) 714 1,942 (235) $2,961 $ 629 155 1,911 2,695 $2 264 266 $ 2,961 Significant Accounting Policies Animal and fish stock: In accordance with industry practice, the stock of fish and animals is reported at the lower of cost or market value. Market values are estimated using current replacement costs. Capital assets: Capital assets include land, man-made lakes, hotel buildings and equipment. Hotel buildings and equipment are amortized on a straight-line basis over their estimated useful lives. In 2019, the remaining estimated useful life of hotel buildings was reduced from 25 to 18 years. Land and man-made lakes are not amortized. Contingent Liabilities: NFP does not routinely collect the scientific data needed to evaluate the ecological health of its park, yet significant growth in visitors over the past 5 years is thought to be damaging park ecology. In 2019, NFP accrued a liability in the amount of $150 (thousand) for possible future environmental restoration costs that may be incurred as a result of deteriorating park ecology. EXHIBIT 2 Other Client Information Beginning the day NFP was founded, Mr. Kramer carefully controlled every aspect of NFP's operations, using his extensive knowledge of veterinary care, marketing, and federal laws and regulations. As CEO, Mr. Kramer was respected by everyone--not only NFP's employees and customers, but also concerned environmental and animal-rights activists. On the financial side, Mr. Kramer worked closely with Newman, Controller and CFO, to design and implement a strong accounting system. All purchases of fish and animals for the park were approved by Mr. Kramer; hotel profitability was reviewed by Mr. Kramer and Newman on a monthly basis; and park admission revenues and cash receipts were compared daily to vehicle counts obtained from monitors installed at the admission gates. A perpetual inventory system was introduced to monitor quantities of fish and animals. The perpetual inventory system was implemented in the current fiscal year to track quantities of fish and animal stock present on the NFP park grounds: NFP personnel easily can track the number of fish released into the man-made lakes, as well as the number of fish caught and removed. Unfortunately, the number of fish births and mortalities are more difficult to track. NFP estimates these numbers based on its prior experience, allowing for possible changes in environmental conditions. Newman has described December 2018 as an unusually harsh winter month and, accordingly, has had to "override" the perpetual system by writing-off significant quantities of fish stock. The writeoff resulted in 20 percent of the December 2018 fish stock balance being charged as an expense on the income statement. In contrast to fish stock, animal stock apparently survived the harsh weather with much greater success. In fact, Newman mentioned that 30 newborn animals survived in 2019, as compared to only 20 in each of the prior three years. Many of these newborn animals were sold to private zoos and other animal parks in 2019; consequently, animal sales revenues have increased in the current year. The growth in successful animal births also has led Newman to reconsider the accounting policy used to record and update animal stock costs. The animal stock account primarily includes costs for adult animal purchases, although some birth-related medical care costs also are included. In the past, these animal costs were assigned to each individual animal using the specific identification inventory method. Newman apparently found that method overly cumbersome, and decided to change to an average cost method for all animals in January 2019. Consequently, when newborn animals now are sold, the average cost of animal stock at the time of sale is used to determine the cost of animal sales to be expensed on the income statement. Northern Frontier Park Part B (20 points) Required: Using all of the information available to you about the Northern Frontier Park engagement in the preceding case, consider the eight (8) audit areas listed below. Identify any areas where additional audit effort will need to be focused to ensure that audit objectives are met. You'll want to highlight any areas that are at greater risk of containing material misstatements or that will require additional audit evidence to ensure that the financial statements conform to GAAP. You may complete this part (Part B) individually, or in a small group of no more than three (3) students. Each student or student group will submit this portion of the assignment using Blackboard (one submission per student group if > 1 student). Use of any materials beyond what I've provided in this document constitutes a violation of the academic honesty agreement. Your task is to submit a brief memo (three pages or less) that summarizes key risks in the audit areas listed below. If possible, try to quantify any differences between what the client has recorded versus what you'd expect based on your knowledge of the client. Your analysis should indicate whether you believe the area/account(s) is likely to contain a misstatement and what the potential misstatement is that causes concern. This is a risk-assessment and audit planning exercise, and you don't have perfect knowledge of the engagement at this stage (nor would an actual auditor!). Your memo should be addressed to the engagement partner on the audit, and assist in identifying areas of concern. Hint: Not all areas may present concerns. Use your judgment and communication skills to help plan an effective audit of this unusual client. Audit areas: 1. Hotel revenue 2. Park admission revenue 3. Accounts receivable & allowance for doubtful accounts 4. Fish stock 5. Animal stock 6. Capital assets & accumulated amortization 7. Accrued liabilities 8. Interest expense

Answer rating: 100% (QA)

NORTHERN FRONTIER PARK Requirement 1 There are three parties involved in this audit Identify each party and identify the direction of any conscious bias related to net income if any each party might h... View the full answer