Fresh Ltd. (Fresh) manufactures organic fruit drinks and its year end is December 31, 2020. You are an audit manager of Lea & Bettiol CPAs and are currently planning the audit of Fresh. You attended the planning meeting with the audit engagement partner and CFO last week and made the following notes:

Notes of planning meeting for Fresh

Fresh’s sales have been strong and the company is forecasting revenue of $40 million this year, which is a 25% increase over the prior year. During the year, the company invested significantly in its beverage production process at its factory to ensure it can keep up with the product demand. It also spent $4 million updating, repairing and replacing most of the machinery used in its production process. Because of the significant demand, the company also expanded the number of warehouses it uses to store inventory. It now utilises 15 warehouses; some are owned by Fresh and some are rented from third parties. There will be inventory counts taking place at all 15 of these sites at the year end.

A new accounting general ledger was introduced at the beginning of the year, with the old and new systems being run in parallel for a period of two months. In addition, Fresh spent $1.3 million on developing a new brand of protein drinks. The company started this process in July 2020 and is close to launching their new product into the market.

As a result of the increase in revenue, Fresh recently recruited a new credit manager to collect outstanding receivables. The CFO is sure the new manager will be successful and so he does not think Fresh needs to continue to maintain a general allowance for doubtful accounts and so he has not booked one for 2020.

The CFO stated that there was a problem in the mixing of raw materials within the production process which resulted in a large batch of drinks tasting different. A number of these products were sold; but due to complaints by customers, no further sales of these beverages have been made. No adjustment has been made to the valuation of the damaged inventory, which will still be held at a cost of $1 million at the year end.

As in previous years, the management of Fresh is due to be paid a significant annual bonus based on the value of year-end total assets.

Required:

(a) Using the notes provided, identify and explain SEVEN audit risks

(b) If the auditor determines the engagement is high risk- what does this mean for detection risk and materiality?

(b) Assuming the auditor determines the inventory is overvalued, what would be the impact, if any, on the audit report?

(c) What type of audit procedure would provide the auditor the best evidence for the existence of the inventory? (1 Mark)

Sandhill Corp., which uses IFRS, signs non-renewable, non-cancellable lease agreement to lease robotic equipment from Xiu Inc. The following information concerns the lease agreement.

Using (1) factor tables, (2) a financial calculator, or (3) Excel functions, calculate the amount of the right-of-use asset and lease liability.

Prepare the initial entry to reflect the signing of the lease agreement. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No entry" for the account titles and enter 0 for the amounts.)

Prepare an amortization schedule for the term of the lease to be used by Sandhill. Use Excel. (Round answers to 0 decimal places, e.g. 5,275.)

Prepare the journal entries on Sandhill Corp.’s books to record the payments related to this lease for the years 2020 and 2021 as well as any adjusting journal entries at its fiscal year ends of December 31, 2020 and 2021. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

The Shamrock Pub provides catering services to local businesses. The following information was available for The Shamrock Pub for the years ended December 31, 2019 and 2020.

Shamrock management is preparing for a meeting with its bank concerning renewal of a loan and has collected the following information related to the above balances.

1.The cash reported at December 31, 2020, reflects the following items: petty cash $1,560 and postage stamps $120. The other current assets balance at December 31, 2020, includes the checking account balance of $3,900.

2.On November 30, 2020, Shamrock agreed to accept a 6-month, $4,940 note bearing 12% interest, payable at maturity, from a major client in settlement of a $4,940 bill. The above balances do not reflect this transaction.

3.Shamrock factored some accounts receivable at the end of 2020. It transferred accounts totaling $10,000 to Final Factor, Inc. with recourse. Final Factor will receive the collections from Shamrock's customers and will retain 2% of the balances. Final Factor assesses Shamrock a finance charge of 3% on this transfer. The fair value of the recourse liability is $360. However, management has determined that the amount due from the factor and the fair value of the resource obligation have not been recorded, and neither are included in the balances above.

4.Shamrock charged off uncollectible accounts with balances of $1,570. On the basis of the latest available information, the 2020 provision for bad debts is estimated to be 2.5% of accounts receivable.

Based on the above transactions, determine the balance for (1) Accounts Receivable and (2) Allowance for Doubtful Accounts at December 31, 2020. (Round answers to 0 decimal places, e.g. 125.)

Accounts receivable ending balance$

Allowance for doubtful ending balance$

Prepare the current assets section of The Shamrock Pub's balance sheet at December 31, 2020. (Round answers to 0 decimal places, e.g. 125.) and,

Compute Shamrock's current ratio and accounts receivable turnover for December 31, 2020. The accounts receivable turnover in 2019 was 4.37.

On January 1, 2020, Blossom Inc. agrees to buy 3 kg of gold at $32,000 per kilogram from Golden Corp on April 1, 2020, but does not intend to take delivery of the gold. On the day that the contract was entered into, the fair value of this futures contract that trades on the Futures Exchange was zero. On January 1, 2020, Blossom is required to deposit $66 with the stockbroker as a margin. The fair value of the futures subsequently fluctuated as follows:

On the settlement date, the spot price of gold is $33,000 per kilogram. Assume that Blossom complies with IFRS.

QUESTION:

1) Prepare the journal entry for the day the futures contract was signed.

2) Prepare the journal entries to recognize the changes in the fair value of the futures contract.

3) Prepare the journal entry that would be required if Blossom settled the contract on a net basis on April 1, 2020.

Q16. The Ralston Company manufactures a special line of graphic tubing items. The company estimates it will sell 75,000 units of this item for the next several years. The beginning 2020 finished goods inventory contains 15,000 units. The target for each year's ending inventory is 10,000 units. Each unit requires five feet of plastic tubing. The tubing inventory currently includes 70,000 feet of the required tubing. Materials on hand are targeted to equal three months’ production. Any shortages of materials are made up by the immediate purchase of materials. Sales take place evenly throughout the year. What are the total feet of tubing budgeted to be used in manufacturing for 2020?

Q17. Rocket Plating Company plans to sell 120,000 units of its GidgetSpinners at a price of $6 per unit. There are 10,000 units in finished goods inventory on January 1 and management wants to increase this inventory by 20% during the year. What is the budgeted number of units to be manufactured in the upcoming year?

Q18. The following data pertains to the month of October for ElmCo. when production was budgeted to be 5,000 units of P90. P90 has standard costs per unit of: 3lbs. of Direct Materials at a cost of $7.00 per lb; 0.20 hours of Direct Labor at $18.00 per hour; and Variable Overhead assigned on the basis of 0.05 machine hours at a rate of $50 per machine hour. Actual production of P90 for October was 4,600 units. In October the production of P90 totaled 4,600 units, using 828 direct labor hours costing a total of $15,732. Determine the direct labor variance. (Negative numbers indicate a favorable variance.)

Orange Inc is debating if they should launch a new version of their tablet - the Clementine 5. It contains a faster processor, more memory, and a bigger screen than their current tablet line (Clementine 4). This product launch is important to remain the market share leader in the tablet segment @ 40%. The selling price for the Clementine 5 is going to be 10% higher, and due to lower cost to manufacturer the new tablet, contribution margin improved to 71.8% until 2019. However, due to comsumer preferances changing rapidly, the company forecasts a price reduction of the Clementine 5 by 10% in 2020 and 2021 as the demand shifts to newer technologies. Orange expects the sales volume of Clementine 5 to be 10% higher than the Clementine 4 at 2 million in 2017, then experience a 12% year-over-year increase for the next 3 years to 2019. Sales for the Clementine 5 will remain flat in 2020 and 2021. The Clementine 4 will continue to see a rapidly declining sales volume of 10% until 2018 and a 15% decline year-over-year (Y/Y) until 2021. Once the company releases the new tablet in 2017, the company is going to reduce the price of Clementine 4 20% to $300, which will decrease the contribution margin to 50%. The total investment for the launch of the Clementine 5 is $550M. Assume yearly fixed costs for Orange at $200M/year, salvage value for their investment is $75M, a corporate tax rate of 35%, NWC of 20%, straight-line depreciation over 5 years, and a discount rate of 12%. Due to the short product lifecycles of the consumer tablet market, Orange quantifies their business cases over a 5 year period. Should Orange launch the Clemetine 5...why?

QUESTION 10

1. It is illegal to price discriminate EXCEPT in cases in which the price differences are due to actual cost differences. This situation is due to which antitrust act?

   		Contestable Market Act
   		Clayton Act
   		Federal Trade Commission Act
   		Sherman Antitrust Act

1 points   

QUESTION 11

1. If a firm is an oligopolist, which is NOT true?

   		It can sell all the units it wants at the going market price.
   		It must pay attention to other firms' prices.
   		It is one of a relatively small number of firms dominating its industry.
   		It is engaged in a strategic game.

1 points   

QUESTION 12

1. Which of the following mergers would most likely be challenged by the Federal Trade Commission?

   		an automaker and an insurance company
   		two largest wireless service providers in the U.S. wireless communication industry
   		two restaurants in a large metro area
   		one oil refinery in the U.S. and another oil refinery in Canada

1 points   

QUESTION 13

1. In a court decision in June 2001, the Federal District Count of Appeals in Washington, D.C. found that Microsoft had violated the

   		Robinson-Patman Act.
   		Clayton Act.
   		Sherman Act.
   		Celler-Kefauver Act.

On May 1, Larkin Hydraulics, a wholly owned subsidiary of Caterpillar (U.S.), sold a 12-megawatt compression turbine to Rebecke-Terwilleger Company of the Netherlands for €4,000,000 payable on August 1. Larkin determined the €4,000,000 price tag on April 1 when the spot rate was $1.0800/€. By the time the order was received and booked on May 1, the euro strengthened to $1.100/€. Nevertheless, Larkin’s Director of Finance now wonders if the firm should hedge against a reversal of the recent trend of the euro and proposes the following options:

OPTION 1: Hedge in the forward market – The 3-month forward exchange quote is $1.1060/€.

OPTION 2: Hedge in the money market – Larkin could borrow euros from the Frankfurt branch of its U.S. Bank at 8% per annum.

OPTION 3: Do nothing – Larkin could wait until the sales proceeds are received in August, hope the recent strengthening of the euro would continue, and sell the euros received for dollars in the spot market.

If Larkin’s cost of capital is 12%, what should Larkin do? At what cost of capital would Larkin be indifferent between Options 1 and 2?