On your first day of a summer internship at BSP Auditing Services, you sit in on an

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Question:

On your first day of a summer internship at BSP Auditing Services, you sit in on an introductory meeting between Ben, a partner at BSP, and Jackie, the CEO of Brenda Catering Inc. (BCI). The following conversation occurs: Ben: You are showing a 3% increase in profit for this current year. This is very impressive considering most catering businesses are experiencing losses. How did you manage this? Jackie: We worked really hard and had a big sale at the end of the year. We had to be creative!
For example, I came up with a “stock up your freezer” promotion where I offered a 10% discount on all frozen food for the month of December so that our clients could save on food that they can purchase now, freeze, and use later. It was so popular that we had trouble keeping up with the deliveries. Another big part of our business is catering weddings in the summer. Wedding events are usually booked one to two years ahead. A big part of the work related to the wedding is obtaining the contract and discussing menus with the bride and groom. Our VP operations suggested that we book a portion of these revenues when the contract is signed in order to match the revenue to the period where the work is done.

We have started to book 20% of the revenue from wedding contracts in the year where the contract is signed. This is fairly conservative as we require a 10% non-refundable deposit with each contract. I don’t know why other catering businesses don’t do this. Ben: Ok, we’ll have to look into these new policies and promotions during our audit. I also wanted to ask about your “Organic Lunch Box” segment of the business. I saw in the local news that there was some controversy over this as it was proved that not all ingredients used were organic. What is the update on this situation? Jackie: I expect this controversy to go away very soon. It was mostly started by one of our competitors to hurt our reputation. It’s true that we did use some non-organic ingredients even if we had advertised 100% organic. We’ve changed those ingredients and I can now assure you that the “Organic Lunch Box” is made from 100% organic ingredients. We are being sued by clients for $200,000, but we didn’t know the ingredients were non-organic, so we can’t be forced to pay anything. That’s why I didn’t accrue anything in this year’s financial statements for this.

Required:
Based on the conversation above, prepare a preliminary financial performance analysis for BCI by
a. identifying questionable accounting policies and potential earnings manipulation.
b. indicating the impact on the risk of material misstatement, noting the assertion(s) mainly affected