Question

Cybernetronics Inc. (Cyber) is a Canadian-owned public company which designs and manufactures communications and control systems. The company's year end is May 31. It is now June 2018.

You, CPA, are the manager for the audit of Cyber and yesterday had met with the treasurer to discuss the year-end audit. The partner responsible for this client has asked you to prepare a report for the client which discusses important financial accounting issues and a memo to him regarding the audit issues you believe are important.

In April 2018, Cyber introduced a price protection policy for its customers to stimulate sales. Cyber promised customers that if it reduced prices after the customer made its purchase Cyber would reduce the customer's liability accordingly or refund the appropriate amount. On June 14, 2018, Cyber reduced its selling prices by 15%. Sales affected by the price protection policy as at May 31, 2018 were recognized in the amount of $2.4 million.

In May 2018, Cyber entered into an arrangement with a real estate company whereby Cyber provided robotic cleaning machines in exchange for free rent at its head office location. The cost of the machines delivered to the real estate company was $900,000 and would have a selling price of $1,500,000. Cyber is not required to pay rent for twelve months commencing June 1, 2018. This represents a savings in lease costs of $1,200,000 to Cyber. This transaction allowed Cyber to reduce its inventory of these machines which management felt was too high. Cyber's draft year-end financial statements do not reflect this transaction.

Senior management of Cyber is concerned about the new requirement to disclose management compensation figures. They want to avoid any criticism that their total compensation is not warranted based on Cyber's financial performance.

*Identify the accounting and audit issues*

Answer 1

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