You, junior auditor, work for the audit firm Penelopy and Cruz LLP (PC) and you have...

 

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You, junior auditor, work for the audit firm Penelopy and Cruz LLP (PC) and you have been assigned to the audit of Frank's Delights (FD), a speciality cake shop. FD was created by Frank Cantanoma over 25 years ago and has thrived in the past with selling speciality cakes for all occasions, from weddings to birthdays. Frank is now getting old and looking to retire. As a result, he has found a potential buyer for the company and has begun preliminary discussions with a potential suitor, Patricia Kemp. Patricia is new to the specialty cake industry but has several years of pastry school training. She figures that this acquisition will be a quick entry into the market, as Frank has done a great job of marketing FD over the years. Patricia doesn't have much money and is going to be getting a loan from her dad to help her buy the company and as a result, she's looking for the right deal and very cautious about over paying for the company. For acquiring the company, she has expressed wanting to just buy the assets of the company, as she heard from her accountant that this was more beneficial to her when making an acquisition. Patricia approached Frank about purchasing just the assets, but Frank has expressed wanting to sell the shares because his accountant stated that this would be more beneficial to him. As a result, there are still some negotiations ongoing about what the sales transaction would look like. But both Frank and Patricia did agree that they would figure out a deal and figured the next best step would be to have an audit performed to ensure everything is presented fairly for basing a valuation off of. Patricia has also expressed her concerns over Frank's baking equipment as she is a bit concerned it may be old and out of date, which is also why she wants to purchase the assets instead, as she can pick and choose which assets she wants. This is where PC was hired by Frank to perform the audit. FD has never been audited in the past, as it does not have any bank debts and has been solely owned by Frank. Frank was always cautious with his year-ends and hired a qualified CPA to perform the bookkeeping. This is where you, junior auditor, come in. Allan Cruz, one of the partners at PC has assigned you to the FD audit and has asked you to do the preliminary materiality assessment and calculation. He wants to know what materiality levels you recommend, what amounts and why you've selected these amounts. (12 marks) Below is some select financial information for FD: Assets Cash $25,000 AR 10,000 Inventory 75,000 Equipment 250,000 Furniture 23,000 Total Assets $383,000 Liabilities AP $92,000 Unearned Revenue 17,000 Taxes Payable 11,000 Total Liabilities 120,000 Retained Earnings 263,000 Total Liabs & R/E $383,000 Income Statement Revenue $473,000 COGS 205,000 Gross Profit 268,000 G&A Expenses 39,000 Salaries 112,000 Net Income before tax $117,000 You, junior auditor, work for the audit firm Penelopy and Cruz LLP (PC) and you have been assigned to the audit of Frank's Delights (FD), a speciality cake shop. FD was created by Frank Cantanoma over 25 years ago and has thrived in the past with selling speciality cakes for all occasions, from weddings to birthdays. Frank is now getting old and looking to retire. As a result, he has found a potential buyer for the company and has begun preliminary discussions with a potential suitor, Patricia Kemp. Patricia is new to the specialty cake industry but has several years of pastry school training. She figures that this acquisition will be a quick entry into the market, as Frank has done a great job of marketing FD over the years. Patricia doesn't have much money and is going to be getting a loan from her dad to help her buy the company and as a result, she's looking for the right deal and very cautious about over paying for the company. For acquiring the company, she has expressed wanting to just buy the assets of the company, as she heard from her accountant that this was more beneficial to her when making an acquisition. Patricia approached Frank about purchasing just the assets, but Frank has expressed wanting to sell the shares because his accountant stated that this would be more beneficial to him. As a result, there are still some negotiations ongoing about what the sales transaction would look like. But both Frank and Patricia did agree that they would figure out a deal and figured the next best step would be to have an audit performed to ensure everything is presented fairly for basing a valuation off of. Patricia has also expressed her concerns over Frank's baking equipment as she is a bit concerned it may be old and out of date, which is also why she wants to purchase the assets instead, as she can pick and choose which assets she wants. This is where PC was hired by Frank to perform the audit. FD has never been audited in the past, as it does not have any bank debts and has been solely owned by Frank. Frank was always cautious with his year-ends and hired a qualified CPA to perform the bookkeeping. This is where you, junior auditor, come in. Allan Cruz, one of the partners at PC has assigned you to the FD audit and has asked you to do the preliminary materiality assessment and calculation. He wants to know what materiality levels you recommend, what amounts and why you've selected these amounts. (12 marks) Below is some select financial information for FD: Assets Cash $25,000 AR 10,000 Inventory 75,000 Equipment 250,000 Furniture 23,000 Total Assets $383,000 Liabilities AP $92,000 Unearned Revenue 17,000 Taxes Payable 11,000 Total Liabilities 120,000 Retained Earnings 263,000 Total Liabs & R/E $383,000 Income Statement Revenue $473,000 COGS 205,000 Gross Profit 268,000 G&A Expenses 39,000 Salaries 112,000 Net Income before tax $117,000