Carroway Clothing Limited Essay Example for Free

Carroway Clothing Limited EssayCarroway Clothing Limited (CCL) is a Canadian-controlled private connection (CCPC) that was incorporated 10 years ago. CCL follows accounting standards for private enterprises (ASPE). It is owned by two brothers, splinter and Charles Carroway, who started the comp all(prenominal) after identifying an opportunity to design and manufacture uniform with innovative fabric. The Carroway brothers have run the business together and have an equal stake in its equity.You are Rose Reddick, a recently graduated CGA depute as team leader to complete the March 31, 20X3, financial statement canvass of CCL. This is the second year that your firm has done CCLs audit. The audit supplying was completed in early March by Blake Mouton, another CGA in your firm, but he has recently announced he is resigning from the firm. Due to scheduling conflicts and an remarkably busy season, he will be unable to continue with the remainder of the audit before he leaves, an d you have 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 scheduled to be completed by May 15, and realizing that you have a limited inwardness of conviction to complete your work on this audit, you immediately begin your survey of the work done to witness and the available client background information. Client backgroundThe Carroway brothers started manufacturing athletic wear, utilizing new techniques in fabric treatments to increase the durability of the fabric. CCLs range of products includes habiliments marges for women and men. The products are, in the main athletic wear, but three years ago they added a line of soil-resistant work clothing.Tax losings have occurred in the early years, but sales have grown all(prenominal) year since the company was started. As sales increased, Chip engage 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 bring new products to market. Chip also hired a trade motorcoach 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 thither are specific requirements for content and format of the tags, the occupation manager is the only individual(a) with authorized access to the software.In July 20X2, CCL signed a contract to produce a line of athletic wear for Sports Shop, a half-size chain of unobjectionable 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 receipt of delivery. Recently, Sports Shop has disputed some of the amounts owing to CCL, 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 even though there is no signature. In fact, CCL has never recorded an allowance in any fiscal year and has not had any issues with uncollectible accounts.The research and early stages of development of CCLs products were financed by a combination of capital invested by the brothers, cuss financing, and a government 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 lend ers and any potential investors that these products are commercially viable. In fact, ground on the 20X1/X2 results, they expect the current product line to become a significant commercial success.The cost of developing this product line, called Walton Work Wear has been deferred and is be amortized (straight-line) at the rate of 10% per year starting in 20X2 (see Deferred Development Schedule, Exhibit 2). Original research costs for the Walton Work Wear products were expensed when incurred, net of grants and SRED credits. The prior-year audit buck shows that this treatment of SRED credits is consistent with CCLs reportage of all taxes (payable and recoverable), which have been accounted for on a current basis without regard to recognition of the prospective tax effects of any current transactions.During the past year, the brothers have turned their attention to a moisture management and odourreduction feature for the athletics tops. They are surefooted that within two years th eir current research will lead to a product line that keeps the sweat away from the skin and minimizes the impact of hidrosis on the clothing. The preliminary prototype works effectively for the first several minutes, but the protection barrier degrades quickly 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 do to finance completion of the new research and development of the Carroway Cool Top products, Chip Carroway expects to obtain a long-term bank loan for CCL. He is apprised that this long-term bank loan will include a more stringent debt to equity covenant than the existing line of credit. He is also implicated in the option of going public and issuing new shares to raise funds for future growth. However, Chip is concerned about the implications of losing some control over CCL so he is leaning towards remaining a CCPC.CCLs chief fin ancial officer, Jack Lawson, was the original office managerand bookkeeper when CCL was first established, and although he has no professional accounting credentials, he does have a degree in business administration with a major in finance. He is responsible for the prep 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 betwixt 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 some(prenominal) 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 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 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 lawsuit and provided Blake with some preliminary details when he was at the office in March. Six months ago, the production process of one of the fabric treatments resulted in an accidental but illegal leak of chemicals into the environment. The local environmental agency objected to such a release of chemicals, and when their objections were cut 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 c oncerned 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 assessment include the fact that this is the second year of the engagement and no audit or financial insurance coverage 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 re knowing the tags to include more marketing elements and lessen the font size of the list of additives used in the fabric treatmen t so that there was more room 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 imperative 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, due to Jacks careful 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 tax income, with a portion of this revenue being generated by the Walton Work Wear line of products in 20X3 (see Exhibit 1).Althoug h 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 self-possessed so far, the following audit work still needs 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(prenominal) 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 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 generalized audit software.Upon 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 intercommunicate in the current-year audit plan.You believe that the client should be informed of your concerns regarding the current years issues as well as the implications of the financing options.