Enterprise Tech

Enterprise Tech Systems (90 MIN)

Outline Now: August 15 th, 2013 Role: CA Report: IFRS Traded on TSX-V  – public users of financial statements ETS -

Primarily engaged in the sale of software and new and refurbished hardware New line of business  – selling refurbished servers

Required:

1. Look at audit work done to date to identify any additional procedures that need to be performed and any issues with procedures already done 2. Provide recommendations on accounting accounting issues in June 30, 2013 YE 3. Evaluate effectiveness of the controls and explain how they might affect the audit Accounting issues:

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Revenue recognition for new line of business Inventory Deferred Taxes Convertible Debt

Audit Issues

To understand the acceptable risk the auditors should take on throughout the audit, we should come to the same conclusions as the previous auditor on audit risk. Inherent Risk: High - Low because: have been client previously, - High because: new line of business, Control Risk - Though all controls are automated, all employees are able to go in and change the system. Audit Risk: Medium - Current audit in progress was not done up to standards - Complications arise because you cannot ask the client to pay for you to take more time to audit the same accounts (A/R and Inventory) because they have already paid for auditing from this firm  – hard to balance the cost of this audit with the procedures that still need to be completed. - Certain audit procedures and evidence collected from accounts have not been sufficient and further audit testing may be required.

Required 1: Accounting Issues at ETS

New Line of Business - Revenue Recognition Issue: Currently accounting for all the maintenance plan up front, but have not met revenue criteria. Also accounting for it with the sale of the servers instead of two separate revenue streams (multiple deliverable)  Analysis: Revenue IAS 18: Criteria: the amount of revenue can be measured reliably; met because each maintenance plan can be valued at $500 (b)

it is probable that the economic benefits associated with the transaction will flow to the entity; met because they pay for the maintenance fee up front

(c)

the stage of completion of the transaction at the end of the reporting period can be measured reliably; and – not met because ETS has not performed any maintenance services and are required to continue the service for two years

(d)

the costs incurred for the transaction and the costs to complete the transaction can be measured reliably. 3- not met because the maintenance services have not be fully performed

Conclusion: Multiple Deliverable with two-year maintenance plan (similar to a warranty)

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Sold 2000 servers = $5 million/ 2000 = 25,000 customers Similar maintenance plans $500 = 500*2000 =100,000 should be allocated to maintenance revenue and recognized over the two year period

Inventory Issue: The scrapped inventory may not be accounted for correctly  – have they been written down to their new net realizable value Analysis: IAS 2 paragraph 34 : The amount of any write-down of inventories to net realizable value and all losses of inventories shall be recognized as an expense in the period the write-down or loss occurs. ETS should ensure that their scrapped material is written down to the cost when it is reclassified and the loss in inventory should be expensed. Conclusion: Scrapped inventory may be overvalued.

Deferred Income Tax Issue: Deferred Income tax may not be allowed to be realized as the likelihood of being able to

realize these losses in the future seems unreasonable. Management projects an annual increase of 21% in revenue which seems quite high based on historical data. We must have comfort over this revenue increase in order to recognize the DTA  Analysis: IFRS 14 & IAS 12 Convertible Debt

Issue: classify and recalculate  Currently classified as long term debt with no equity portion Analysis: IFRS 7  –section of how to classify a convertible loan IAS 29 & 32 & 39 Conclusion: PV bond  – residual from principal to equity

Required 2: Audit Issues from previous audit and current audit issues Cash

Appropriate cash testing has been done as they have agreed the GL to the bank confirm. The commission expense agreed to the payroll expenses generated by the system. Inquire: Why are there cancelled cheques? Cheque 101008 – 132,694 – why is this still outstanding? the date is 1 year old  – should they reverse in GL Cancelled cheques why are they not reversed in the general ledger? Why did you only vouch some Conclusion: We should inquire further about the cancelled cheques and why cheque 101008 is still recorded in the general ledger. Further, we should obtain further audit evidence over cash by collecting a sample of receipts and matching them to what has hit the bank and the general ledger. 

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 Accounts Receivable Issue: The current audit procedure that was done was not sufficient as the auditors chose a

sample that management suggested and not a random sample. Thus, this was a weak substantive test and further audit procedures should be done.  Analysis: CAS 500 – the audit evidence should be directly obtained from auditors. Since the auditors did not choose the sample, it is less reliable. However, it was strong that they analyzed an AR from each category. Conclude:  They should get a larger random sample of AR that the auditor selects and externally requests confirmation without the client involvement in the process to fully obtain valuation and existence over AR. Inventory Issue 

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The inventory count only checked from sheet to floor but did not check from floor to sheet When they found discrepancies in inventory count  – why did they not increase sample size and how did they decide that this difference was immaterial?  – what does it translate to in revenue? Some piles were not counted and assumed to be scrap but were never confirmed with management

 Analysis: CAS 500 – A16: The current audit procedures did not provide confidence over

completeness and valuation of the inventory. Conclude: Since the inventory count cannot be performed with confidence at this date a qualified opinion may be issued.

Convertible Debt   Analysis: Audit procedures should be done to test the accuracy and classification of the

convertible debt by inspecting the agreement that was made for the loan and confirming all the amounts used to the loan agreement. DTA –  Deferred Income Tax   Audit procedure: get comfort over the valuation of the losses in prior years and

forecasted revenue amounts Payroll & Purchasing   Analysis: Currently there are good internal controls in place for both payroll and

purchasing as they have automated the process and few employees are authorized to make changes to these accounts and there is a segregation of duties from the person who inputs the transaction to the person who signs off on the expense. Further the system requires associated documentation to process the request ma king this control more reliable and decreasing the risk associated with these accounts. Required 3: Evaluate Internal Overall controls

Despite the highly-automated controls, the internal controls are still considered a medium risk because all employees have the same access and can make changes to the data. It is suggested that ETS alter their system to only allow access to employees who are responsible for certain information to make these controls more reliable. Further, auditors (us) should further inquire about the high volume of discounts and obtain audit evidence over these discounts to ensure that these are be accounted and processes correctly. Financing Need Angelo and Gus, owners of Angus Glass require $6,000,000 to purchase the land and building they currently lease. With two weeks to make the decision and limited financing, Angelo and Gus will have to either purchase the property through additional sources of financing, or terminate the lease and find a new space to conduct operations.