Carroway Clothing Limited Essay Example for Free

Carroway Clothing Limited EssayCarroway Clothing Limited (CCL) is a Canadian-controlled private corporation (CCPC) that was incorporate 10 years ago. CCL follows accounting standards for private enterprises (ASPE). It is owned by two brothers, Chip and Charles Carroway, who started the confederacy subsequently identifying an opportunity to design and manufacture clothing with mod fabric. The Carroway brothers consume run the business together and leave an equal stake in its equity.You be Rose Reddick, a deep graduated CGA assigned as team leader to complete the March 31, 20X3, financial statement audit of CCL. This is the second year that your hearty has done CCLs audit. The audit planning was completed in early March by Blake Mouton, a nonher(prenominal) CGA in your firm, but he has recently announced he is resigning from the firm. Due to scheduling conflicts and an unusu aloney busybodied season, he will be un competent to continue with the remainder of the audit bef ore he leaves, and you substantiate been asked to take over leadership of the audit team. It is now late April, and the team under Blakes supervision has completed about two-thirds of the audit field work. The audit is entryd to be completed by whitethorn 15, and realizing that you create a limited amount of time to complete your work on this audit, you immediately pay off your surveil of the work done to date and the available client background in setion. Client backgroundThe Carroway brothers started manufacturing gymnastic wear, utilizing mod techniques in fabric treatments to increase the durability of the fabric. CCLs range of products includes clothing names for women and men. The products are, primarily athletic wear, but troika years ago they added a line of soil-resistant work clothing.Tax losses have occurred in the early years, but sales have grown each year since the company was started. As sales increased, Chip hired a team of design specialists to create new clothing items with innovative features. This team was hired three years ago to begin the research and development required to read new products to market. Chip also hired a marketing 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 software was implemented to produce tags for the products. Because there are specific requirements for content and format of the tags, the production manager is the only individual with authorized access to the software.In July 20X2, CCL signed a wad to produce a line of athletic wear for Sports Shop, a small chain of sporting goods stores. The line of athletic wear features the chains logo and trademark colours. CCL ships product to these stores using a company truck. The contract specifies that Sports Shop is to pay for each shipment within 30 days of signed response of delivery. Recently, Sports Shop has disputed some of the amounts owing to CC L, maintaining that there 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 simply dropped the shipment at the store counter and did not wait for the store managers signature. Chip has not provided an allowance for these receivables since the delivery was made change surface though there is no signature. In fact, CCL has never recorded an allowance in any pecuniary year and has not had any issues with uncollectible accounts.The research and early stages of development of CCLs products were payd by a combination of capital invested by the brothers, bank financing, and a authorities grant (see financial statements, Exhibit 1). scientific Researchand Experimental Development (SRED) credits 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 a ny potence investors that these products are commercially viable. In fact, based on the 20X1/X2 results, they expect the current product line to befit a significant commercial success.The cost of developing this product line, called Walton Work Wear has been deferred and is organism amortized (straight-line) at the rate of 10% per year jump in 20X2 (see Deferred Development Schedule, Exhibit 2). Original research be for the Walton Work Wear products were expensed when incurred, brighten of grants and SRED credits. The prior-year audit file shows that this treatment of SRED credits is consistent with CCLs report of all revenue enhancementes (payable and recoverable), which have been accounted for on a current basis without regard to recognition of the future tax effects of any current transactions.During the past year, the brothers have turned their attention to a moisture concern and odourreduction feature for the athletics tops. They are confident that within two years their current research will lead to a product line that keeps the sweat away from the skin and minimizes the impact of perspiration on the clothing. The preliminary prototype works effectively for the first several minutes, but the protection barrier degrades right away and more work is required. This product line will be called Carroway Cool Top and is currently in the research stage only. The deferred development costs for this product line are $975,000.In order to finance completion of the new research and development of the Carroway Cool Top products, Chip Carroway expects to obtain a semipermanent bank loan for CCL. He is aware that this long-term bank loan will include a more stringent debt to equity covenant than the existing line of credit. He is also interested in the option of liberation public and issuing new shares to raise funds for future growth. However, Chip is concern about the implications of losing some control over CCL so he is leaning towards remaining a CCPC.CCLs chief financial officer, knave Lawson, was the original office managerand bookkeeper when CCL was first established, and although he has no lord accounting credentials, he does have a degree in business administration with a major in finance. He is responsible 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 experience in the requirements of going public, so Chip will require additional information from you in order to be able to make an informed decision between the financing options available.CCL has grown rapidly over the last three years, after implementing 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 like to provide an incentive plan to these new employees, but is not in a position to provide a cash bonus. Therefore, CCL is considering a limited issue of demarcation options to its employees. The run options would entitle an employee to acquire equity shares of CCL at $50 per share at any time starting six months after the date of their issue. Some employees are uncertain about the impact of the issue of stock options on their taxable income and are considering disposing of them immediately upon acquisition.Chip has recently been notified about a pending instance and provided Blake with some preliminary details when he was at the office in March. Six months ago, the production unconscious process of one of the fabric treatments resulted in an accidental but illegal leak of chemicals into the environment. The local environmental operation objected to such a release 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 like to know whether there are any other risks associated with this issue and how they should be dealt with.Review of audit findings to dateThe audit-planning file indicates that Blake assessed the inherent risk associated with this audit as low. The reasons for this judgment include the fact that this is the second year of the engagement and no audit or financial reporting problems have been uncovered in the past audit. Blake included a note that the design of the clothing tags is now being handled 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.During this time, the marketing manager redesigned the tags to include more marketing elements and minimized the baptistery size of the list of additives ut ilize in the fabric treatment so that there was more live to describe the innovative features of the clothing. The newly 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 crying they are aware of the chemicals used in the treatment of these fabrics.Another important factor influencing the risk assessment is that, in spite of operating losses in the past, CCL has never had serious cash flow problems, cod to Jacks careful business planning and the good relationship CCL has with its lender. CCL is experiencing growth in profits, indicating that the investing in the research and development department is paying off. The draft financial statements show positive net income and strong revenue, with a portion of this revenue being generated by the Walton Work Wear line of products in 20X3 (see Exhibit 1).Although 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 most sections of the audit file. In addition to evaluating all of the evidence gathered so far, the following audit work still demand to be completed review 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 drafttax returns.Once all of these steps have been completed and approval of the statements is received from the client, the schedule of unadjusted errors and final 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 sample small amounts of data for the audit and you are not comfortable basing your conclusio ns 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 generalized audit software.Upon examining the file, you picture that a number of financial reporting and potential tax issues have arisen this year that were not bewilder in prior years. These issues and other new information have not been adequately addressed in the current-year audit plan.You believe that the client should be informed of your concerns regarding the current years issues as headspring as the implications of the financing options.