1. A process flowchart focused on the most important, i.e. key, controls for handling purchases necessary to carry out the company’s main business. Focus on the main trade goods purchased (equipment is already in place), the inventory management, and how to/ who pays the bills
Role: CPA Team of Advisors hired to support management in developing an appropriate system of internal controls for a new company that has been created to provide a Covid-related service or product (note: it will be up to the Team to decide what product or service the company is focused on – pick just one product or service to simplify the processes)
Client: Covid Response Company A has just started up and its first year end will be August 30, 2021. The company reports using ASPE and the financial statements will be audited to meet bank loan covenants, one of which pertains to accounts receivable (they are pledged as collateral for the business startup and equipment loan the company took on in summer 2020).
Background: You are in the stage of reviewing the background information that the client has been able to provide in advance of your meeting (it’s pretty sketchy – which is par for the course for new clients and start up businesses):
· The bank loan they were able to get was for $500,000 using the personal guarantee of the sole shareholder Chaman Anders.
· They currently have 4 employees – Chaman and three others (they have capacity to work full-time but some are not yet 100% busy)
· Business has been booming and they have had no time to document their processes and do any record-keeping yet. The bank is providing online payroll processing and Chaman is the admin as they have full control of the banking activities.
· They optimistically project to have sales of $1M to $2M in a full year.
Key Deliverables: Chaman wants advice and clear documentation of the process that should be followed for handling the purchase-payables-payments cycle. They expect a report with the following
Part A: Process Advisory Services
1. A process flowchart focused on the most important, i.e. key, controls for handling purchases necessary to carry out the company’s main business. Focus on the main trade goods purchased (equipment is already in place), the inventory management, and how to/ who pays the bills (10 marks)
– Hand-drawn flowcharts are acceptable (make sure its legible, rough draft acceptable for individual submission) – just scan/ photo and append or embed photo in doc
– Or use software (excel, ppt, word… that would be the order of apps I would work with) and print screen or paste special (image) in doc
2. Documented list of key purchasing/payables/payment controls the company should implement. Be sure to capture how the company should capture evidence of the controls (e.g. signatures, reports, document types) being followed and articulate the audit objective/financial statement assertion(s) that are supported by putting these controls in place. Your list of controls must be tailored to the company. The cost of the controls should be considered when making recommendations (i.e. the company does not have capacity to invest significant dollars). (45 marks)
1. A list of daily or weekly and month-end banking procedures the company should complete. Note: almost all of the company’s receivables are handled electronically due to covid restrictions minimizing the use of cash. Provide an example of a bank reconciliation that Chaman can use to keep on top of the banking (be sure to tailor the steps to the company specifics) and explain the key steps.
– Banking procedures list (8 marks)
§ Note: procedures you identify should be provided in a list format and NOT in a written paragraph format.
– Example bank reconciliation and explanation of steps to complete (10 marks)
Part B: Research and Communication
2. Prepare a brief explanation of how Covid Response Company A should address the presentation and disclosure of their debt (identified on the bank confirmation that Chaman expects to use – see attached) identifying what the auditors will be looking for in financial statements. Include a quotation from the appropriate accounting framework, i.e. the relevant CPA Guidance and Standard Collection (Accounting and Assurance) section. Feel free to note any advice about how Chaman should handle the bank confirmation (5 marks)
3. Chaman is also worried about how the auditors will audit the company’s inventory account. They have heard horror stories from their friends about auditors doing sampling and then messing up and having to redo inventory procedures. Investigate the audit standards, provide a brief explanation of what steps the auditors need to follow when sampling inventory (so Chaman can make sure they’re prepared and monitor the auditors to see that they follow through). Provide a quote from the assurance standards to support your explanation, (including the CAS # reference and specific paragraph reference). Make a list of steps that Chaman can expect the auditors to follow when they test inventory (including how the auditors’ tests serve to gather evidence in support of the financial statement assertions/ audit objectives related to inventory).
– Research standard quotation (2 marks)
– Explanation (2 marks)
– List of auditor’s inventory procedures (15 marks)
