Required 

a) Calculate materiality and justify your choice of calculation. 

b)List four areas of above-average inherent risk for this audit. Be specific as to the possible effects on the financial statements of the identified risk. 

c)Make your notes for work to be done at the end of the fieldwork.

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Heather Lauren Retail Limited (HLR) is a chain of mid-to-high-end ladies fashion retailers. They are found in more expensive retail malls and downtown streets of large Canadian cities. Their calling card has always been their core of well trained fashion assistants helping women find clothes that fit their style. As such, they have traditionally paid more to its assistants than the retail average, in addition to which assistants receive a commission on all sales made during their shift. During the pandemic, this model simply did not work. With no in-person shopping in most places and reduced in-person shopping in all other places, the need for assistants was down. At first HLR tried setting up an online consulting presence to keep some of the staff busy, but the new website was buggy and many of HLR's older clients did not like shopping over the internet. By early 2021, HLR shut down the website and wrote off its investment of $4,670,000 in website development. Sales of $40,000,000 in fiscal 2019 fell to $15,000,000 in 2020 before bouncing back to $12,000,000 through to the end of September 2021. A major hit to the business was the loss of so many trained fashion assistants. Fewer than 20% returned to work in 2021 when the retail stores reopened. Most had retired or found something else to do during the pandemic. Fewer sales assistants meant lower service levels, resulting in fewer customers willing to pay higher prices. Meanwhile, those who could shop online found the convenience of shopping online outweighed the free fashion advice. At the same time, as sellers of "see and be seen" clothes, with fewer places for women to show off their style, demand for high fashion clothes had collapsed. In late 2021, a new CEO declared Christmas to be make or break for the stores. Normally, 50% of HLR's sales were in November and December. The new CEO, Darlene Cardinal, stated that if sales were less than $9,000,000 over the Christmas period, then HLR would have to declare bankruptcy. With few assets other than inventory and store fixtures, HLR's bank required debt to equity to be less than 1:1. HLR does their inventory count on October 31, at which point they had $8,000,000 inventory on hand and $7,000,000 in store fixtures plus $9,000,000 in unamortized capital lease assets. Bank debt was $5,000,000 and $6,500,000 in capital lease payments due. The leases are accounted for using IFRS 16 and were capitalized with an implicit rate of 6.5%. Ms. Cardinal has tried to negotiate lower lease payments and lease buyouts with no success. Ms. Cardinal clashed with the CFO of HLR over the use of IFRS 16, leading the CFO to resign November 15. Other notes All stores are corporately owned as is common in this space. Few high end chains use franchises. Total assets at December 31, 2020 were $28,000,000 compared with $36,000,000 the year before. The 2020 lawyer's letter referred to an accident where a pedestrian fell in on ice in front of the downtown Calgary store. The pedestrian suffered severe injuries including a fractured skull and sued for $2,000,000 in damages. HLR offered $200,000 in settlement which was rejected. HLR has enjoined the owner of the store property as well as the City of Calgary as joint and severally liable for any damages. Due to court delays, the lawsuit will not be heard until 2024 at the earliest. Heather Lauren Retail Limited (HLR) is a chain of mid-to-high-end ladies fashion retailers. They are found in more expensive retail malls and downtown streets of large Canadian cities. Their calling card has always been their core of well trained fashion assistants helping women find clothes that fit their style. As such, they have traditionally paid more to its assistants than the retail average, in addition to which assistants receive a commission on all sales made during their shift. During the pandemic, this model simply did not work. With no in-person shopping in most places and reduced in-person shopping in all other places, the need for assistants was down. At first HLR tried setting up an online consulting presence to keep some of the staff busy, but the new website was buggy and many of HLR's older clients did not like shopping over the internet. By early 2021, HLR shut down the website and wrote off its investment of $4,670,000 in website development. Sales of $40,000,000 in fiscal 2019 fell to $15,000,000 in 2020 before bouncing back to $12,000,000 through to the end of September 2021. A major hit to the business was the loss of so many trained fashion assistants. Fewer than 20% returned to work in 2021 when the retail stores reopened. Most had retired or found something else to do during the pandemic. Fewer sales assistants meant lower service levels, resulting in fewer customers willing to pay higher prices. Meanwhile, those who could shop online found the convenience of shopping online outweighed the free fashion advice. At the same time, as sellers of "see and be seen" clothes, with fewer places for women to show off their style, demand for high fashion clothes had collapsed. In late 2021, a new CEO declared Christmas to be make or break for the stores. Normally, 50% of HLR's sales were in November and December. The new CEO, Darlene Cardinal, stated that if sales were less than $9,000,000 over the Christmas period, then HLR would have to declare bankruptcy. With few assets other than inventory and store fixtures, HLR's bank required debt to equity to be less than 1:1. HLR does their inventory count on October 31, at which point they had $8,000,000 inventory on hand and $7,000,000 in store fixtures plus $9,000,000 in unamortized capital lease assets. Bank debt was $5,000,000 and $6,500,000 in capital lease payments due. The leases are accounted for using IFRS 16 and were capitalized with an implicit rate of 6.5%. Ms. Cardinal has tried to negotiate lower lease payments and lease buyouts with no success. Ms. Cardinal clashed with the CFO of HLR over the use of IFRS 16, leading the CFO to resign November 15. Other notes All stores are corporately owned as is common in this space. Few high end chains use franchises. Total assets at December 31, 2020 were $28,000,000 compared with $36,000,000 the year before. The 2020 lawyer's letter referred to an accident where a pedestrian fell in on ice in front of the downtown Calgary store. The pedestrian suffered severe injuries including a fractured skull and sued for $2,000,000 in damages. HLR offered $200,000 in settlement which was rejected. HLR has enjoined the owner of the store property as well as the City of Calgary as joint and severally liable for any damages. Due to court delays, the lawsuit will not be heard until 2024 at the earliest.

Answer rating: 100% (QA)

a Calculating materiality involves determining a threshold or benchmark for evaluating the significance of misstatements in the financial statements The choice of calculation method depends on various ... View the full answer