- You Work For The Public Accounting Audit Firm Of Teper And Lubetsky Llp You Have Been Approached By Armaity Corp To 1 (98.37 KiB) Viewed 11 times
- You Work For The Public Accounting Audit Firm Of Teper And Lubetsky Llp You Have Been Approached By Armaity Corp To 2 (55.16 KiB) Viewed 11 times
You work for the public accounting (audit) firm of Teper and Lubetsky LLP. You have been approached by Armaity Corp. to be its auditor for the 2021 fiscal year. Armaity Corp. is a medium sized
company operating in Southern Ontario as a merchandise wholesaler, buying goods to sell to retailers. [For this assignment, ignore issues related to communication with prior auditors] You will review the draft financial statements found on the next page as you prepare for audit planning. In addition, upon an inquiry, you discover the following three facts about Armaity Corp.: •
Company management maintains best-in-class business practices such as requiring all business agreements to be clearly documented (for example, with its many suppliers) and has never had even one dispute concerning payments to suppliers. Everyone in the industry is known to appreciate the high ethical standards of the management team. . The
company has two shareholders, and each of them is intimately knowledgeable of
company financial and operating affairs. These two shareholders often speak directly to the Senior Management team. In fact, the holder of all of the
company's Bonds (see Liabilities section of the Balance Sheet) is one of these two shareholders. • The
company continuously changes suppliers of its inventory, including the country of origin and currency of payment. The complexity of accounting for these foreign currency transactions is an inherent feature of the
company's financial system. Required: a) Using the three facts discovered upon inquiry (see above), evaluate these facts and come to a decision as to whether Teper and Lubetsky should or should not accept the audit engagement. Justify your decision using the three facts and balancing the "Pro" and "Con" arguments. [10 marks] b) Assuming you accept the audit engagement, use the draft 2021 financial statements to evaluate Armaity Corp.'s: i. Liquidity by calculating the 2021 Current Ratio and Quick Ratio (also known as Acid Test) compared to the industry standard of a Current Ratio of 2.8:1 and Quick Ratio of 2: 1. [5 marks] ii. Collectability of the 2021 net Accounts Receivable using 2020 as a reasonable basis. [5 marks] c) Propose and justify a dollar amount for Materiality for this 2021 audit of Armaity Corp. (assumes you accept the engagement) using the following bases: 1. Rule of Thumb of between 5% - 10% of Operating Profit (i.e. Pre-tax profit) ii. Industry standard of 0.3% of revenues [10 marks total for (c)] Note: Use the following definitions for the purposes of this assignment Current Ratio= Current Assets / Current Liabilities Quick Ratio or Acid Test = (Cash + Net Receivables) / Current Liabilities
Financial Statements for Armaity Corp. I Balance Sheet in $ ASSETS: Current Assets: Cash Accounts Receivable (Gross) less Allowance for Doubtful Accounts Inventory Total Current Assets Non-Current Assets Land Buildings (net of Accum. Depr.) Total Non-Current Assets TOTAL ASSETS LIABILITIES: Current Liabilities: Accounts Payable Bonds Payable (current) Total Current Liabilities Non-Current Liabilities Bonds Payable Total Non-Current Liabilities TOTAL LIABILITIES EQUITY: Common Shares Retained Earnings TOTAL EQUITY TOTAL LIABILITIES & EQUITY Income
Statement in $ Net Sales Cost of Goods Sold Gross Profit Operating Expenses: Administrative Expenses Other Operating Expenses Depreciation, Buildings Total Operating Expenses Operating Profit Income Tax Expense Profit Armaity Corp. As at Dec. 31, 2021 Draft 2020 Act. 49,000 106,000 (5,000) 140,000 290,000 140,000 140,000 860,000 910,000 1,000,000 1,050,000 1,290,000 1,315,000 37,000 67,000 120,000 120,000 157,000 187,000 29,000 85,000 (4,000) 155,000 265,000 400,000 420,000 400,000 420,000 557,000 607,000 189,000 189,000 544,000 519,000 733,000 708,000 1,290,000 1,315,000 Armalty Corp. For the Year ended Dec. 31, 2021 Draft 2,254,000 1,397,000 857,000 273,000 445,000 50,000 768,000 89,000 35,600 53,400