It is November 10, 2020. You are the audit manager at Lagos & Lisbon LLP on the UFO Hotels Ltd. ("UFO") audit for the year ended September 30, 2020. UFO operates three hotels in the Thousand Islands region of Eastern Ontario, which is near the US border. The company is privately owned by the Ako family and a few friends. Rachel Ako is the managing director. The majority shareholders are her father and mother. They have handed over the day-to-day management to Rachel.

The minority shareholders rely on UFO's financial statements to determine the company's profitability and dividends and have always required that the financial statements be audited. Your firm has been auditing UFO's financial statements for the past five years. The Ministry of Tourism reported that Industry revenues was expected to grow by between 7.5 and 8% for 2020, however COVID lockdowns which started in March of 2020 severely impacted revenue. As such by late September 2020 Rachel approached a local bank to obtain a loan of $500,000 to help UFO deal with its cash shortfall. The bank requested for UFO's latest audited financial statements.

The interim audit was due to be carried out by your firm in August 2020, but this was cancelled as the two key members of UFO's accounting staff, including the controller, contracted COVID-19 and had to be hospitalized for an extended period of time. Rachel was forced to quickly hired two temporary accountants to replace them. Prior to getting hired at UFO, the two accountants worked part-time for a small local accounting firm and did tax returns and helped with compilations. Both are working towards their CPA designation and were very excited to gain new "real accounting" experience by working at UFO.

Revenue Process

Each hotel operates the same accounting system. Revenue comes from renting out rooms to customers and operating a restaurant and a bar in each hotel, for hotel guests and non-guests.

There are a number of ways that customers can book a room at UFO hotels online: through the hotel's website, which is hosted by a third party that links into UFO's reservation system and through Booking.com, an online intermediary reservation agent. When making online reservations, directly through the hotel's website and Booking.com, guests are not required to prepay for their accommodations. The full price is charged at reception at check-out. Historically about 10% of guests who made an online reservation cancelled their hotel stay.

Booking.com charges a 15% fee on the total price of each reservation made through its website. For example, if a guest reserves three nights at $100 per night, Booking.com would charge a $45 fee ($300 x 15%). Each quarter UFO receives a statement from Booking.com listing the number of reservations that were made and cancelled over the previous three months. The past two statements showed that close to 85% of guests cancelled their reservations between April and September 2020. All citing COVID-19 as the reason for cancellation.

During January and February 2020, many local and American tour operators reserved blocks of hotel rooms for their winter festival boat/dinner/casino group tours. The American Tour operators are invoiced in USD$. These tours are especially popular among American senior citizens since casinos are not allowed to operate in the State of New York. Under a long-standing arrangement, both American and Canadian tour operators settle their payment with UFO under the 5/10 net 30 payment terms.^[1] Since the COVID-19 pandemic started UFO has had a difficult time collecting payment from the tour operators. Three American operators stopped responding to UFO's follow-up emails.

The bar and restaurant tills are computerized. Customers can either pay at these tills in cash or by credit/debit card or, if hotel guests, charge amounts to their rooms. In late November 2018, UFO upgraded the software running on its tills. The upgrade made the tills menu more user friendly.

Investment in Bitcoins

Due to the impact of COVID-19 on the hotel industry and the significant drop in hotel bookings revenue, in June 2020, Rachel decided to invest about $375,000 to purchase 31 Bitcoins. UFO hotels also begun to accept Bitcoin as a method of payment on its website. Initially the purchase of Bitcoins turned out to be a great decision. As the price of Bitcoins almost doubled from $12,000 to about $25,000 over the summer months. However, on August 22, 2020, when Rachel attempted to exchange some of the Bitcoins into Canadian dollars, she was shocked to find out that the cryptocurrency exchange, QuadrigaCX, where she purchased the Bitcoins has shut down. UFO Bitcoin wallet also vanished. QuadrigaCX remains shut and the matter is being investigated by the RCMP's cybercrime investigation unit. In late October 2020, Rachel was informed by RCMP that the chances of UFO recovering its Bitcoins are very slim. UFO has two other Bitcoins which are stored in a wallet on a different cryptocurrency exchange, which is open and active. This is the first time that you and your firm have dealt with a business that transacted in Bitcoins. All of the Bitcoins, including the once UFO kept by QuadrigaCX have been included as cash on UFO's financial statements.

Other Matters

Guests can use their room key to charge bar and restaurant purchases to their rooms. In late February 2020, six families with teenagers visited one of UFO's hotels. One evening, while all the parents went out to a casino, several of the teenagers, all under the age of 19, stayed behind and used one of the room keys to purchase large quantities of alcohol. Two of the teenagers suffered alcohol poisoning and had to be hospitalized. The parents of these two teenagers contacted the Alcohol and Gaming Commission of Ontario to complain about UFO selling alcohol to persons under the age of 19. On October 15, 2020, after completing its investigation the Commission fined UFO $50,000 and suspended its liquor license for two months. Rachel was shocked by the fine amount and is worried that UFO won't have enough cash to settle. She plans to contact the Commission to find out if she can appeal the fine or at least negotiate a reduction. The new accountants told Rachel that they will wait to recognize the fine in UFO's financial statements until she contacts the Commission.

In July 2020, Rachel filed two applications for COVID-19 government support grants, including the wage subsidy grant. However, UFO did not qualify for the grants because it carried the large balance of Bitcoins on its financial statements.

UFO has a dedicated front-line staff who all continued to show up for work despite the health risk associated with COVID-19. Since late August 2020 Rachel has been late with paying its staff on time.

In anticipation of a busy summer 2020 season, in August 2019, UFO preordered a large quantity ($40,000) of kegged beer. UFO pre-paid for the order, which did not contain a cancellation clause. Despite all of the summer events being cancelled due to COVID-19, on May 3, 2020 UFO hotels had to accept the delivery the kegged beer. When Rachel tried to drink some of the beer in late September 2020, the beer seemed flat and didn't taste right anymore.

Excerpts of Key Information from the Financial Statements

UFO Hotels
Balance Sheet
September 30, 2020 (CAD $)
	2020 (Draft)	2019
Cash	820,000	1,000,200	Note 1
Accounts Receivable	445,900	91,009
Inventory	45,500	11,040	Note 2
Current Liabilities	1,580,000	487,000

Note 1 - Amount includes 31 Bitcoins and balance from USD $ bank account.

Note 2 - Amount includes kegged beer.

UFO Hotels
Quarterly (3 months) Revenue
Year	Oct-Dec	Jan-Mar	Apr-Jun	July-Sep	Total
2020	$1,390,745	$1,389,411	$189,360	$87,004	$3,056,520
2019	$1,290,875	$1,458,970	$1,780,987	$1,109,840	$5,640,672
2018	$1,187,049	$1,278,330	$1,690,334	$1,009,044	$5,164,757

Process Description and Controls

Purchasing of food, alcohol and supplies for the restaurants and bars at the three hotels are handled centrally by Tom, the purchasing clerk. Each Thursday morning the catering staff perform a full count of all inventory, resulting in UFO having one of the most real-time and accurate perpetual inventory systems in the industry. An auditor from Lagos & Lisbon attends one count a quarter. The weekly inventory count is supervised by the hotel manager, who then surveys what products are needed and emails Tom a list of required items. Tom consolidates the emailed lists from the three hotels and completes purchase orders. The purchase orders are then sent to the controller who reviews the purchase orders against the emailed lists. After approving and initialing, the purchase orders are sent back to Tom, who places orders with pre- approved suppliers. When the purchased goods are delivered to each hotel, restaurant staff verify the delivery quantity of products against the packing slip. Initialed packing slip are then scanned and emailed to Tom who matches each packing slip to the purchase order. Tom then forwards the two documents to the accounts payable department. Payment for the delivered goods is processed only when the accounts payable clerk matches the supplier invoice with the purchase order and the packing slip. All paid invoices, together with the associated purchase orders and packing slips are scanned and stored electronically.

Required:

As the audit manager at Lagos and Lisbon, complete the following components of the audit file.

Part A. Identify 3 factors which impact the risk of material misstatement at the overall financial statement level. For each factor indicate the impact on RMM (Increase or decrease). 

Description of Factor	Impact on RMM (increase or decrease)

Part B. Identify 2 factors which impact the RMM for sales and accounts receivable cycle. For each factor indicate the relevant account(s) and related assertion(s), the impact on RMM (increase or decrease) and the rationale (explanation) for the impact. 

Description of Factor	Relevant Account(s) and Related Assertion(s)	Impact on RMM ( increase or decrease) and Rationale

Part C. Assume that you have decided to rely on controls in the Inventory cycle. Select 2 different controls in the Inventory cycle. For each control provide a procedure that would test the effectiveness of control (In other words, provide a test of controls). You may also provide related examples from the purchase / disbursement cycle so long as it relates to procurement of inventory. 

Control	Assertion	Test of control

Part D. Based on the case facts, prepare 2 substantive test procedures that the auditor should perform during the audit of the Inventory cycle. For each procedure indicate the relevant assertion.

Complete your response in the chart below:

Procedure	Assertion

Part E. Provide a conclusion about the audit approach that you will use for the Inventory cycle. Explain your rationale. 

PART F. Complete an audit plan related to future events or conditions that may cause UFO to cease as a going concern. The audit plan consists of the question below:

1. Using analytical procedures (trend analysis), what are your expectations of UFO's revenues for 2020 had the COVID related cancellations not impacted operations. HINT: The issue here is assessing going concern by assessing COVID impacts to 2020 operations.
2. Two additional analytical procedures to be performed. Show calculations and include a rationale based on case facts. 
3. What is your conclusion regarding UFO hotel's ability to continue as a going concern? Support conclusion with case facts and your analysis in part II above. 

PART G. Regarding the treatment of the $50,000 fine from the Alcohol and Gaming Commission:

1. Does the accounting treatment of the contested fine proposed by the accountants conform with ASPE? Explain 
2. Assume that UFO did not pay and did not record the fine in its September 30, 2020 financial statements but filed an appeal on September 29, 2020. If the appeal is unsuccessful, and in addition to the original $50,000 fine the Alcohol and Gaming Commission on January 7, 2021 levies a late payment penalty of 10% ($5,000), explain what type of a subsequent event is this? How should this subsequent event be treated, assuming that the fine ($50,000) and penalty ($5,000) are material. 
3. Provide two procedures that the auditor could use to identify unrecorded liabilities, including contingent liabilities.

Answer rating: 100% (QA)

Part A Identify 3 factors which impact the risk of material misstatement at the overall financial statement level For each factor indicate the impact on RMM Increase or decrease Description of Factor ... View the full answer