Dream Craft Mattress Emporium (DCME), a leading mattress manufacturing company based in Winnipeg, takes pride in...

   

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Dream Craft Mattress Emporium (DCME), a leading mattress manufacturing company based in Winnipeg, takes pride in crafting a diverse range of premium mattresses. Established by industry veteran Ron Smith, the company entered a new era in January 2023, with Ron's son, Ryan Smith, assuming leadership. Ryan has worked for years at Dream Craft Mattress Emporium (DCME) taking on roles in various departments so he knows the business quite well. Ron believes that Ryan is ready for the challenge of leading the company. DCME's success is rooted in the use of top-tier materials ensuring durability during shipping and innovative designs appealing to diverse consumer preferences. The clientele includes high-end and luxury hotels, retirement homes, cruise lines, and rental properties. DCME's end consumers are businesses. However, there's been an unexpected downturn in the leisure business sector and sales across client segments have been down since last year. Approximately 50% of sales are conducted through our secure online platform, while the rest involves telephone orders. Around 10% of revenues are derived from an important major client, Elysian Retreats, a high-end boutique hotel chain that went bankrupt in 2023. Elysian had placed a big order at the end of 2022 for over 50 mattresses and DCME is still awaiting payment one year later. Ryan believes that the future of the industry resides in shifting the business toward a bed-in-a- box business model. The bed-in-a-box model gained popularity in recent years, where mattresses are compressed, vacuum-sealed, and delivered in a compact box. This trend has been closely tied to the rise of online mattress sales. He also believes that DCME should start selling premium mattresses to households instead of focusing solely on selling to other businesses. To explore this potential business, he estimates that DCME requires a $1 million dollar cash infusion in the form of a business loan from DCME's bank. Ryan knows that the bank will require an audit in order to assess the financial position of DCME and its ability to repay the loan. As a result, Ryan has hired your firm, Professional Auditors LLP, to conduct an audit. This would be DCME's first ever audit. Company Information The company specializes in producing high-quality memory foam mattresses. Memory foam excels at relieving pressure points by contouring to the shape of the body. This can be particularly beneficial for those with joint or back pain. However, one big drawback of these types of mattresses is heat retention. Traditional memory foam has a reputation for retaining heat, which can lead to discomfort for some individuals, especially in warmer climates. Mattress manufacturers responded by incorporating cooling technologies, and now, there's a greater demand for mattresses with better temperature regulation. DCME's current inventory stock comprises of memory foam mattresses which are decreasing in popularity as the company is racing to develop its own integrated technology mattresses with sensors for sleep tracking and climate control features. For the 2023 Boxing Day Sale, the company had to offer steep 50% discounts to its customers to entice them to buy, something DCME has never done before. The company's accounting department is quite small for the size of the company. The controller has been away on sick leave for the better part of the year and DCME's staff have been working increasingly longer hours to make sure that reporting deadlines are met. Ryan did not think about replacing the controller as he was under the impression that the accounting team had things under control. The senior bookkeeper was given approval delegation for approving customer orders but due to pressing deadlines she started to approve orders without conducting proper credit checks, raising concerns about the reliability of customer payments. In addition, a significant portion of accounts receivable has remained outstanding for over half a year, not including the Elysian Retreats account. In an effort to meet the sales quota for the year, and get his performance bonus, the DCME's Director of Sales reached out to the senior bookkeeper asking her to record a sale for 10 mattresses to a retirement home before year end. The Director of Sales insists that the deal is "practically done" and that his client just needs "to sign on the dotted line" to accept the contract. The senior bookkeeper recorded the sale even though DCME has not received the signed contract nor shipped the mattresses to the retirement home. In an effort to streamline processes, the senior bookkeeper has delegated the signing of company cheques to another employee, bypassing the standard two-signature protocol involving the accountant and the owner. With the company facing cash flow issues, there is a risk of delayed payments to vendors, potentially straining relationships and affecting the supply chain. In the past vendor have offered allowances for payment such as volume discounts for raw material purchases. The bookkeeper has reached out to various vendors to inquire about volume discounts not being acknowledged on raw material invoices. This year was particularly hard for raw material suppliers and no volume discounts were provided. However, the bookkeeper knows that these discounts were the norm in prior years and she decided to enter them in the accounting system as an invoice credit. To make matters worse, there was a fire at one of DCME's warehouses back in October and some mattresses that here held in inventory caught on fire. They couldn't be salvaged and had to be destroyed. The bookkeeper didn't have time to remove these mattresses from the inventory master file in the accounting system. Financial Information for the year ended December 31, 2023: 2023 2022 Cash $ 199,000.00 $ 420,000.00 Accounts receivable $ 520,000.00 $ 210,000.00 Inventory $ 950,000.00 $ 500,000.00 Fixed assets $ 400,000.00 $ 650,000.00 Accounts payable $ 570,000.00 $ 350,000.00 Bank loan $ 599,000.00 $ 530,000.00 Share capital $ 900,000.00 $ 900,000.00 Revenue COGS $ 1,625,310.00 $ 859,059.00 $ $ 1,985,000.00 785,988.00 Gross profit $ 766,251.00 $ 1,199,012.00 Operating expenses $ 605,000.00 $ 549,000.00 Net profit before tax $ 161,251.00 $ 650,012.00 Required: A) What audit risk would you assign to the company? Why? B) Calculate preliminary materiality and justify your decision. C) Discuss the internal controls of the company identify weaknesses and provide recommendations to strengthen them. D) Discuss the audit over revenue, accounts payable and inventory. What kind of procedures would you be interested in performing and give some examples. Dream Craft Mattress Emporium (DCME), a leading mattress manufacturing company based in Winnipeg, takes pride in crafting a diverse range of premium mattresses. Established by industry veteran Ron Smith, the company entered a new era in January 2023, with Ron's son, Ryan Smith, assuming leadership. Ryan has worked for years at Dream Craft Mattress Emporium (DCME) taking on roles in various departments so he knows the business quite well. Ron believes that Ryan is ready for the challenge of leading the company. DCME's success is rooted in the use of top-tier materials ensuring durability during shipping and innovative designs appealing to diverse consumer preferences. The clientele includes high-end and luxury hotels, retirement homes, cruise lines, and rental properties. DCME's end consumers are businesses. However, there's been an unexpected downturn in the leisure business sector and sales across client segments have been down since last year. Approximately 50% of sales are conducted through our secure online platform, while the rest involves telephone orders. Around 10% of revenues are derived from an important major client, Elysian Retreats, a high-end boutique hotel chain that went bankrupt in 2023. Elysian had placed a big order at the end of 2022 for over 50 mattresses and DCME is still awaiting payment one year later. Ryan believes that the future of the industry resides in shifting the business toward a bed-in-a- box business model. The bed-in-a-box model gained popularity in recent years, where mattresses are compressed, vacuum-sealed, and delivered in a compact box. This trend has been closely tied to the rise of online mattress sales. He also believes that DCME should start selling premium mattresses to households instead of focusing solely on selling to other businesses. To explore this potential business, he estimates that DCME requires a $1 million dollar cash infusion in the form of a business loan from DCME's bank. Ryan knows that the bank will require an audit in order to assess the financial position of DCME and its ability to repay the loan. As a result, Ryan has hired your firm, Professional Auditors LLP, to conduct an audit. This would be DCME's first ever audit. Company Information The company specializes in producing high-quality memory foam mattresses. Memory foam excels at relieving pressure points by contouring to the shape of the body. This can be particularly beneficial for those with joint or back pain. However, one big drawback of these types of mattresses is heat retention. Traditional memory foam has a reputation for retaining heat, which can lead to discomfort for some individuals, especially in warmer climates. Mattress manufacturers responded by incorporating cooling technologies, and now, there's a greater demand for mattresses with better temperature regulation. DCME's current inventory stock comprises of memory foam mattresses which are decreasing in popularity as the company is racing to develop its own integrated technology mattresses with sensors for sleep tracking and climate control features. For the 2023 Boxing Day Sale, the company had to offer steep 50% discounts to its customers to entice them to buy, something DCME has never done before. The company's accounting department is quite small for the size of the company. The controller has been away on sick leave for the better part of the year and DCME's staff have been working increasingly longer hours to make sure that reporting deadlines are met. Ryan did not think about replacing the controller as he was under the impression that the accounting team had things under control. The senior bookkeeper was given approval delegation for approving customer orders but due to pressing deadlines she started to approve orders without conducting proper credit checks, raising concerns about the reliability of customer payments. In addition, a significant portion of accounts receivable has remained outstanding for over half a year, not including the Elysian Retreats account. In an effort to meet the sales quota for the year, and get his performance bonus, the DCME's Director of Sales reached out to the senior bookkeeper asking her to record a sale for 10 mattresses to a retirement home before year end. The Director of Sales insists that the deal is "practically done" and that his client just needs "to sign on the dotted line" to accept the contract. The senior bookkeeper recorded the sale even though DCME has not received the signed contract nor shipped the mattresses to the retirement home. In an effort to streamline processes, the senior bookkeeper has delegated the signing of company cheques to another employee, bypassing the standard two-signature protocol involving the accountant and the owner. With the company facing cash flow issues, there is a risk of delayed payments to vendors, potentially straining relationships and affecting the supply chain. In the past vendor have offered allowances for payment such as volume discounts for raw material purchases. The bookkeeper has reached out to various vendors to inquire about volume discounts not being acknowledged on raw material invoices. This year was particularly hard for raw material suppliers and no volume discounts were provided. However, the bookkeeper knows that these discounts were the norm in prior years and she decided to enter them in the accounting system as an invoice credit. To make matters worse, there was a fire at one of DCME's warehouses back in October and some mattresses that here held in inventory caught on fire. They couldn't be salvaged and had to be destroyed. The bookkeeper didn't have time to remove these mattresses from the inventory master file in the accounting system. Financial Information for the year ended December 31, 2023: 2023 2022 Cash $ 199,000.00 $ 420,000.00 Accounts receivable $ 520,000.00 $ 210,000.00 Inventory $ 950,000.00 $ 500,000.00 Fixed assets $ 400,000.00 $ 650,000.00 Accounts payable $ 570,000.00 $ 350,000.00 Bank loan $ 599,000.00 $ 530,000.00 Share capital $ 900,000.00 $ 900,000.00 Revenue COGS $ 1,625,310.00 $ 859,059.00 $ $ 1,985,000.00 785,988.00 Gross profit $ 766,251.00 $ 1,199,012.00 Operating expenses $ 605,000.00 $ 549,000.00 Net profit before tax $ 161,251.00 $ 650,012.00 Required: A) What audit risk would you assign to the company? Why? B) Calculate preliminary materiality and justify your decision. C) Discuss the internal controls of the company identify weaknesses and provide recommendations to strengthen them. D) Discuss the audit over revenue, accounts payable and inventory. What kind of procedures would you be interested in performing and give some examples.