Question

Featherbed Surf & Leisure Holidays Ltd. is a resort company based on Vancouver Island. Its operations include boating, surfing, diving, and other leisure activities; a backpackers’ hostel; a family hotel; and a five-star resort. Justin and Sarah Morris own the majority of the shares in the Morris Group, which controls Featherbed. Justin is the chair of the board of directors of both Featherbed and the Morris Group, and Sarah is a director of both companies as well as the CFO of Featherbed.

In February 2020, Justin Morris approached your audit firm, KFP Partners, to carry out the Featherbed audit for the year ended June 30, 2020. Featherbed has not been audited before but this year the audit has been requested by the company’s bank and a new private equity investor group that has just acquired a 20-percent share of Featherbed.

Featherbed employs 30 full-time staff. These workers are employed in administration, accounting, catering, cleaning, and hotel/restaurant duties. During peak periods, Featherbed also uses part-time and casual workers. These workers tend to be travellers visiting the West Coast who are looking for short- term employment to help pay their traveling expenses.

Justin and Sarah have a fairly laid-back management style. They trust their workers to work hard for the company and they reward them well. The accounting staff, in particular, are very loyal to the company. Justin tells you that some accounting staff enjoy their jobs so much they have never taken any holidays, and hardly any workers ever take sick leave.

There are three people currently employed as the accountants, the most senior of whom is Peter Pinn. Peter heads the accounting department and reports directly to Sarah. He is in his fifties and plans to retire in two or three years. Peter prides himself on his ability to delegate most of his work to his two accounting staff, Kristen and Julie. He claims he has to do this because he is very busy developing a policy and procedures manual for the accounting department. This delegated work includes opening mail, processing payments and receipts, banking funds received, performing reconciliations, posting journals, and performing the payroll function. Julie is a recently graduated Chartered Professional Accountant. Kristen works part-time—coming into the office on Mondays, Wednesdays, and Fridays. Kristen is responsible for posting all journal entries into the accounting system and the payroll function. Julie does the balance of the work, but they often help each other out in busy periods.

Required

Using the factors in the above scenario, assess audit risk.

Answer 1

1. Justin and Sarah Morris own majority of Morris Group which has controlling interest in Featherbed. Justin also holds the chair of board of directors position in Morris Group as well as Featherbed, while Sarah is Director of both companies and CFO of Featherbed. This is not the best practice as the risk of them acting in their own favor to boost share value is highly imminent. The chair of board of directors must be an independent director. They also have the position to hamper the interest of minority shareholders of the company.
2. Accounting staff never taking leave is also not healthy for the company. There needs to be a back up for the work done by these staff and there has to be a BCP test whether the work can continue in their absence. A mandatory leave policy is to be implemented to test the same.
3. Peter delegating his work is fine, but there has to be a review process in place to ensure his juniors have been accurate with processing payments and receipts, banking funds received, performing reconciliations, posting journals, and performing the payroll function.
4. Kristen is responsible for posting all journal entries into the accounting system and the payroll function. - She being a part time employee may not be best suitable for this role because this involves robust and daily activities which might get hampered due to her unavailability. (She only works 3 days a week)