You are conducting the audit of Perfect Patisserie (PP) for the first time. The PP CEO...
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You are conducting the audit of Perfect Patisserie (PP) for the first time. The PP CEO Doug "Doughnuts" Douglas (DD) has authorised you to communicate with the previous auditor and allowed the previous auditor to disclose information obtained during the audit. PP is a café chain that has around 30 cafes in Australian major cities. The chain runs under a franchise model whereby franchisees (i.e. café owners) pay a lump sum to PP when they open their café and a percentage of profits each year. In return, PP provides the owners with products and marketing. Under the franchise agreements, café owners can only purchase products from PP. PP has been profitable over the last 10 years and DD tells you that he predicts at least 10% profit growth over the next 2-3 years. There are two main drivers of this profitability. First, revenue from the lump sum payments from new franchisees (which account for around a third of overall revenue). Second, PP gets a significant margin on the cakes and coffee that it sells to franchisees. PP reduces costs by making cakes in-house, using a large-scale oven in each location and entering into 5-year contracts with a major coffee supplier. The most recent contract was signed in June 2022 and guarantees that PP will purchase large amounts of coffee and that the purchases will grow by no less than 5% per year. DD has refused to allow you to view this contract, however, as he believes it is a key competitive advantage for PP. You are aware of a recent government enquiry into the operation of all franchises in Australia. At this enquiry, a number of PP franchisees stated the quality of the cakes and coffee that they are forced to buy from PP is now much lower than rival cafes and that consequently, their cafes are not profitable. It is rumoured that the government will implement a new law which will prohibit forcing franchisees to only purchase from companies like PP. Required 1. Based on the above information, list ONE factor that is relevant to assessing the integrity of PP. For this factor, explain whether PP seems to have high or low levels of integrity (2 marks) 2. Identify TWO business risks faced by PP. For each business risk, discuss how it might stop PP from meeting its business objectives. (2 marks) 3. For ONE of the business risks you have chosen, explain how this may result in a material misstatement of an account balance. Name the account balance, whether the account is likely to be overstated or understated, and the audit assertion likely to be affected. (3 marks) You are conducting the audit of Perfect Patisserie (PP) for the first time. The PP CEO Doug "Doughnuts" Douglas (DD) has authorised you to communicate with the previous auditor and allowed the previous auditor to disclose information obtained during the audit. PP is a café chain that has around 30 cafes in Australian major cities. The chain runs under a franchise model whereby franchisees (i.e. café owners) pay a lump sum to PP when they open their café and a percentage of profits each year. In return, PP provides the owners with products and marketing. Under the franchise agreements, café owners can only purchase products from PP. PP has been profitable over the last 10 years and DD tells you that he predicts at least 10% profit growth over the next 2-3 years. There are two main drivers of this profitability. First, revenue from the lump sum payments from new franchisees (which account for around a third of overall revenue). Second, PP gets a significant margin on the cakes and coffee that it sells to franchisees. PP reduces costs by making cakes in-house, using a large-scale oven in each location and entering into 5-year contracts with a major coffee supplier. The most recent contract was signed in June 2022 and guarantees that PP will purchase large amounts of coffee and that the purchases will grow by no less than 5% per year. DD has refused to allow you to view this contract, however, as he believes it is a key competitive advantage for PP. You are aware of a recent government enquiry into the operation of all franchises in Australia. At this enquiry, a number of PP franchisees stated the quality of the cakes and coffee that they are forced to buy from PP is now much lower than rival cafes and that consequently, their cafes are not profitable. It is rumoured that the government will implement a new law which will prohibit forcing franchisees to only purchase from companies like PP. Required 1. Based on the above information, list ONE factor that is relevant to assessing the integrity of PP. For this factor, explain whether PP seems to have high or low levels of integrity (2 marks) 2. Identify TWO business risks faced by PP. For each business risk, discuss how it might stop PP from meeting its business objectives. (2 marks) 3. For ONE of the business risks you have chosen, explain how this may result in a material misstatement of an account balance. Name the account balance, whether the account is likely to be overstated or understated, and the audit assertion likely to be affected. (3 marks)
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Answer rating: 100% (QA)
Solution 1 One factor that is relevant to assessing the integrity of PP is whether the company is co... View the full answer
Related Book For
Auditing a business risk appraoch
ISBN: 978-0324375589
6th Edition
Authors: larry e. rittenberg, bradley j. schwieger, karla m. johnston
Posted Date:
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