'Carroway Clothing Limited Essay\r'

'Carroway habilitate Limited (CCL) is a Canadian- disc all overled private corporation (CCPC) that was co-ordinated 10 yrs ago. CCL follows accounting standards for private enterprises (ASPE). It is own by two br another(prenominal)(a)s, checkout and Charles Carroway, who started the club by and by identifying an opportunity to design and manufacture habiliment with advanced(a) fabric. The Carroway brothers substantiate run the business together and halt an equal stake in its law.\r\nYou argon rosiness Reddick, a recently graduated CGA assigned as team attractor to complete the March 31, 20X3, monetary statement visit of CCL. This is the second course of study that your inviolable has done CCL’s take stock. The audit planning was perfect in early March by Blake Mouton, other CGA in your firm, unless he has recently proclaimed he is resigning from the firm. Due to scheduling conflicts and an unusu exclusivelyy use up season, he leave alone be unable t o come up with the remainder of the audit before he leaves, and you piddle been asked to take over leadership of the audit team. It is forthwith late April, and the team under Blake’s surveillance has undefiled about two-thirds of the audit field blend. The audit is scheduled to be completed by may 15, and realizing that you pay back a limited amount of quantify to complete your work on this audit, you immediately take down your follow-up of the work done to leave and the operational invitee background in initializeion. Client background\r\nThe Carroway brothers started manufacturing gymnastic break up, utilizing new techniques in fabric interpositions to enlarge the durability of the fabric. CCL’s range of returns includes uniform livestocks for women and men. The convergences are, primarily athletic wear, but three years ago they added a limn of soil-resistant work clothing.\r\nTax losses bring occurred in the early years, but sales fuck of f grown severally year since the comp whatsoever was started. As sales increased, spot hired a team of design specialists to create new clothing items with sophisticated features. This team was hired three years ago to begin the look into and ripening required to assume new products to market. Chip in whatever case hired a selling manager with a degree in fine arts to design the tags attached to each piece of clothing and develop the marketing programs. At the same time, specialized parcel was implemented to farm tags for the products. Because thither are specific requirements for content and format of the tags, the issue manager is the only individual with important access to the software.\r\nIn July 20X2, CCL signed a lease to produce a line of athletic wear for Sports Shop, a small chain of sporting goods stores. The line of athletic wear features the chain’s logo and trademark colours. CCL ships product to these stores using a company truck. The contract spec ifies that Sports Shop is to pay for each expedition within 30 days of signed recognise of delivery. Recently, Sports Shop has disputed some of the amounts owing to CCL, maintaining that thither is no proof of receipt of the shipment. When Chip questioned the CCL driver, the driver admitted that when he was running late with his deliveries, he only if dropped the shipment at the store counter and did not wait for the store manager’s signature. Chip has not deliverd an allowance for these receivables since the delivery was made counterbalance though there is no signature. In fact, CCL has never recorded an allowance in any monetary year and has not had any manages with uncollectible accounts.\r\nThe search and early stages of tuition of CCL’s products were financed by a combination of capital invested by the brothers, bank financing, and a government grant (see fiscal statements, Exhibit 1). scientific Research and Experimental Development (SR&ED) credit were received in 20X1 and 20X2 and have been reported as government grants for accounting purposes. The sales volume of the soil-resistant clothing is now great enough to assure the lenders and any potential investors that these products are commercially viable. In fact, establish on the 20X1/X2 results, they expect the received product line to become a significant commercial success.\r\nThe be of developing this product line, called Walton Work stand has been deferred and is universe amortized (straight-line) at the rate of 10% per year starting line in 20X2 (see Deferred Development Schedule, Exhibit 2). Original look into costs for the Walton Work Wear products were expensed when incurred, net of grants and SR&ED credits. The prior-year audit file renders that this treatment of SR&ED credits is pursuant(predicate) with CCL’s reporting of all taxes (payable and recoverable), which have been accounted for on a catamenia basis without regard to intelligence of the hereafter tax effects of any current transactions.\r\nDuring the early(prenominal) year, the brothers have turned their attention to a moisture management and odourreduction feature for the athletics tops. They are confident that within two years their current research lead lead to a product line that keeps the sweat away from the skin and minimizes the partake of perspiration on the clothing. The preliminary prototype kit and boodle effectively for the first several minutes, but the protective cover barrier degrades quickly and more work is required. This product line provide be called Carroway Cool screening and is currently in the research stage only. The deferred learning costs for this product line are $975,000.\r\nIn graze to finance completion of the new research and maturement of the Carroway Cool Top products, Chip Carroway expects to draw a long-term bank loan for CCL. He is aware that this long-term bank loan will include a more stringent debt to hono r covenant than the existing line of credit. He is also interested in the option of going creation and issuing new shares to raise funds for future offset. However, Chip is concern about the implications of losing some control over CCL so he is leaning towards be a CCPC.\r\nCCL’s chief financial officer, old salt Lawson, was the original office manager and bookkeeper when CCL was first established, and although he has no professional accounting credentials, he does have a degree in business face with a major in finance. He is responsible for(p) for the preparation of financial reports and is involved in all of the financing discussions. Jack has always been employed by companies which are private and he has no consider in the requirements of going public, so Chip will require additional information from you in order to be able to make an informed ratiocination between the financing options available.\r\nCCL has grown rapidly over the last three years, after implement ing its research and development activities. During 20X1, the implementation of the research and development department resulted in the hiring of many new employees in research and development, production, and administration. CCL would akin to provide an incentive plan to these new employees, but is not in a position to provide a hard currency bonus. Therefore, CCL is considering a limited issue of stock options to its employees. The stock options would entitle an employee to acquire equity shares of CCL at $50 per share at any time starting six months after the epoch of their issue. Some employees are un authoritative about the jounce of the issue of stock options on their taxable income and are considering disposing of them immediately upon acquisition.\r\nChip has recently been notified about a pending lawsuit and provided Blake with some preliminary details when he was at the office in March. cardinal months ago, the production process of one of the fabric treatments resul ted in an accidental but illegal leak of chemicals into the environment. The local environmental agency objected to such a write of chemicals, and when their objections were ignored they filed a lawsuit against CCL, alleging that CCL was negligent in the release of the chemicals and in violation of environmental regulations. Chip is not concerned about this lawsuit since he notes that the amount of chemicals that leaked from CCL equipment was not significant, but he would care to know whether there are any other risks associated with this issue and how they should be dealt with.\r\nReview of audit findings to date\r\nThe audit-planning file indicates that Blake assessed the inherent risk associated with this audit as low. The reasons for this assessment include the fact that this is the second year of the engagement and no audit or financial reporting problems have been uncovered in the bygone audit. Blake included a note that the design of the clothing tags is now being handle d jointly with the marketing manager, who had persuaded the production manager to give her access to the specialized software while he was away from the office on vacation.\r\nDuring this time, the marketing manager redesigned the tags to include more marketing elements and minimized the font size of the list of additives employ in the fabric treatment so that there was more room to describe the innovative features of the clothing. The new designed tags have been on product for the past two months, and CCL has recently heard some feedback from concerned customers that the information about the additives is difficult to read. These customers have allergies to certain chemicals, so it is imperative they are aware of the chemicals utilise in the treatment of these fabrics.\r\nAnother important part influencing the risk assessment is that, in spite of operating(a) losses in the past, CCL has never had serious cash flow problems, due to Jack’s alert business planning and the good relationship CCL has with its lender. CCL is experiencing growth in profits, indicating that the investment in the research and development department is paying off. The draft financial statements show positive net income and strong revenue, with a theatrical role of this revenue being generated by the Walton Work Wear line of products in 20X3 (see Exhibit 1).\r\nAlthough no misstatements or errors have been documented in the work completed so far, you are not sure if this is because conclusions have not yet been drawn on intimately sections of the audit file. In addition to evaluating all of the order gathered so far, the following audit work still needs to be completed: retread of the accounts in Exhibit 2; team leader review of all work done by subordinates; completion of the audit work on unrecorded liabilities, subsequent events, and contingencies; and review of the draft tax returns.\r\n one time all of these steps have been completed and commendation of the stateme nts is received from the client, the schedule of unadjusted errors and last review of the financial statements must be completed. The file will then be ready for a final partner review before release of the audit report. You see from the files that Blake has used traditional sampling to example small amounts of info for the audit and you are not comfortable basing your conclusions on the work done because with the increase in sales this year and the research and development activities, there is a large amount of data to audit. You are considering an appropriate alternative, such as reason audit software.\r\nUpon examining the file, you realize that a number of financial reporting and potential tax issues have arisen this year that were not present in prior years. These issues and other new information have not been adequately addressed in the current-year audit plan.\r\nYou believe that the client should be informed of your concerns regarding the current year’s issues as well as the implications of the financing options.\r\n'