It's October 10, 2021, and you, CPA, work as an audit senior at Chow and Co. LLP.

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Question:

It's October 10, 2021, and you, CPA, work as an audit senior at Chow and Co. LLP. One of the firm's long-time clients, Tyler Wallace, owns a group of companies, and recently added a new addition to the group with the creation of Tyler's Travelling Circus Co. (TTC). TTC is an outdoor circus that travels across Canada from early spring to late fall.

Dave Warren is the circus manager. Since Tyler operates numerous companies, he relies on Dave to run the day-to-day operations of TTC, with minimal oversight. Dave's annual bonus is based on a percentage of pre-tax net income per the audited statements. Dave's brother, Ryan, travels with the circus and has been doing the bookkeeping because he knows the accounting program a little. TTC travelled to 24 cities in the year, and it opened for four days in each city.

You are the audit senior for TTC's first year, which ended on August 31. The year-end date was selected to match Tyler's other companies. The partner has requested that you prepare an audit planning memo and analyze any financial reporting issues prior to beginning fieldwork. Your memo should include procedures to be performed in response to any financial reporting issues identified. Engagement acceptance procedures have already been performed. You have gathered TTC's draft financial statements (Appendix I). The audit is a specific requirement under the bank financing covenants, and TTC follows accounting standards for private enterprises (ASPE).

Tyler has also asked Chow and Co. LLP for an assessment of where controls are lacking in its current processes, and recommendations on any improvements. Tyler has indicated that the current processes are manual because TTC is just starting out, but that he wants to automate as many of the controls as possible. The partner has requested that you draft a management letter to address this.

TTC was in Vancouver in mid-September. You attended the Vancouver performance and noted your observations (Appendix II). You then met with Ryan and obtained additional information (Appendix III). While you were talking with Ryan, an employee burst in and said one of the trailers had been accidentally set on fire by the fire eater. By the time you both arrived at the trailer, the fire had been put out, but $20,000 worth of equipment stored in the $10,000 trailer had been destroyed.

Appendix I

Draft financial statements

Tyler's Travelling Circus Co.
Balance Sheet
As at August 31, 20121
Assets
Cash		$118,000
Inventory:
Concessions (Note 1)		35,000
Game booth prizes		10,000
Property, plant and equipment (Note 2)		900,000
Intangible Assets		100,000
Total Assets		$1,163,000
Liabilities
Accounts payable and accruals		$110,500
GST/HST payable		56,500
Income tax payable		55,000
Bank loan payable		720,000
Total Liabilities		$942,000
Shareholder's equity
Common shares		$1,000
Retained earnings		220,000
		221,000
Total liabilities and Shareholder equity		$1,163,000

Notes:

All the concession inventory purchases are posted to inventory, and they are expensed when sold. No inventory count was performed at year end.
During the year, TTC acquired a significant number of assets. Included in these acquisitions was the purchase of
1. four large trucks from Big Truck Trucking Co. (BTT),
2. a long-haul transport company, for $250,000 cash. TTC recorded them at the exchange amount of $250,000, in the financial statements.
3. Tyler owns 70% of BTT.
4. The other 30% is owned by an unrelated party.
5. The trucks had been used in BTT's long-haul trucking business and had a remaining net book value of $200,000 on BTT's balance sheet. Similar trucks sell in the market for $300,000.
6. Appendix I (continued)

Draft financial statements

Tyler's Travelling Circus Co.
Income Statement
For the year ended August 31 2021

Revenues (entrance fees, game and concession sales)		$1,685,000

Expenses:
Amortization	100,000
Automotive (gas, repairs, and maintenance)	89,000
Costumes	21,000
Food and beverage:
Concessions	233,000
Performers and other staff	100,000
Prizes	70,000
General and administrative	7,000
Interest	40,000
Insurance	180,000
Salaries, wages and benefits	570,000	1,410,000
Net Income before taxes		$275,000
Taxes		55,000
Net Income		$220,000

Appendix II

Notes from CPA's circus visit

1. I go to one of the ticket booths. They only accept cash. When I pay the $20 entrance fee, the employee takes my money and puts it in a cash box, then hands me an entrance ticket from a pile of pre-printed tickets. I notice a few disgruntled customers, who have only debit and credit cards with them, turn around and leave. The ticket looks like this:

2. An employee at the entrance gate asks to see my ticket. I show her; she nods and steps aside to let me through. I put the ticket in my pocket.

3. I see a cage of jaguars. I was excited about the animal exhibits. A huge poster at the entrance had indicated that animals were on loan from the Vancouver Zoo.

The employee tending the cage explains that in cities that have their own zoos, Dave has arranged for TTC to borrow an animal exhibit from the zoo in exchange for advertising. The employee thinks the idea is brilliant because it would be expensive to rent these animals — about $2,000 per day. Dave has made this arrangement in six cities.

He advises me to stand back from the cage, because in Toronto one of the tigers borrowed from the Toronto Zoo injured a customer. Apparently, the customer told Dave that he has incurred $15,000 of medical costs related to the incident and that he thinks, morally, TTC owes him and should pay for these costs. The employee says, "I hope that Dave adjusted the insurance policy for the presence of animals. Maybe the Toronto Zoo is responsible and not TTC, because it was their animal. Who knows?"

4. I play a few games and then get a snack. I buy a burger and fries, and watch the vendor place my money in a cash box and mark my purchase on a summary sheet beside the cash box. I then watch him throw several sandwiches in the garbage. I ask why they are being thrown out. He explains that they were yesterday's sandwiches and Tyler has a strict policy of serving food prepared fresh daily. He says it is a real shame. He's not sure how much food has been thrown out over the past season, because no tracking is done.

Appendix III

Discussion with bookkeeper

Ryan seemed genuinely thrilled that he finally has you as a resource, because he is still learning bookkeeping. He admitted to often relying on Dave for help, and that this is the first time he has been responsible for any bookkeeping.

Apart from Ryan, Dave is the only employee who knows the file path to the accounting software installed on the office computer, and therefore a password is not required. Ryan explained that Dave mainly accesses the accounting records to monitor how things are going. On the road, the staff has access to the office computer so they can check their email and surf the internet.

Every day, Ryan records the day's sales and GST/HST based on the cash in the cash boxes once they're returned to him from the ticket, concession, and game booths (minus the float, of course). He then finds a bank where he can make the deposit. Each concession vendor also submits a manual summary sheet of their daily sales, which he uses to update the inventory and cost of sales accounts. He has yet to figure out how to use the accounting software's inventory module. Similarly, the game booth staff submit a manual summary sheet of the prizes given away during the day.

Ryan mentioned that inventory levels are restocked at the beginning of each show, so this keeps the amount available for customers reasonably consistent throughout the course of the season.

Required:

You are the audit senior for TTC's first year, which ended on August 31. develop a memo identifying various issues. develop quantitative and qualitative analyses of each issue, develop relevant accounting/auditing standards, and suggest recommendations for each issue.