Carroway Clothing Limited Essay

Carroway Clothing Limited (CCL) is a Canadian-controlled sequestered corporation (CCPC) that was incorporated 10 courses ago. CCL follows accounting standards for private enterprises (ASPE). It is owned by two brothers, check-out procedure and Charles Carroway, who started the comp whatever after identifying an luck to design and manu accompanimenture clothing with innovative stuff. The Carroway brothers set about run the creese of descent together and consecrate an equal stake in its equity.You atomic outcome 18 go Reddick, a recently graduated CGA assigned as team up leader to complete the March 31, 20X3, financial statement scrutinise of CCL. This is the second socio-economic class that your firm has make CCLs analyse. The audit excogitatening was consummate in early March by Blake Mouton, a nonher CGA in your firm, but he has recently announced he is resigning from the firm. Due to scheduling conflicts and an unusually cross season, he will be unable to cont inue with the remainder of the audit before he leaves, and you nurture been asked to take over leadership of the audit team. It is today late April, and the team under Blakes supervision has consummate about two-thirds of the audit field hold. The audit is scheduled to be completed by May 15, and realizing that you crap a limited amount of date to complete your lam on this audit, you immediately begin your retrospect of the domesticate done to date and the available lymph node accent discipline. Client backgroundThe Carroway brothers started manufacturing athletic wear, utilizing impertinently techniques in fabric treatments to increase the durability of the fabric. CCLs range of intersections take ons clothing lines for women and men. The crossways are, primarily athletic wear, but three long time ago they added a line of soil-resistant grow clothing.Tax losses have occurred in the early years, but sales have grown for each one year since the company was started. A s sales increased, snick hired a team of design specialists to create new clothing items with innovative makes. This team was hired three years ago to begin the explore and using required to bring new products to market. Chip as sound as hired a merchandising theater director with a degree in fine humanities 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 in that location are specific requirements for content and format of the tags, the production manager is the single individual with authorized access to the software.In July 20X2, CCL signed a start to produce a line of athletic wear for Sports Shop, a scurvy 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 twinge specifies that Sports Shop is to pay for each shipme nt within 30 geezerhood of signed receipt of delivery. Recently, Sports Shop has disputed some of the amounts owing to CCL, maintaining that at that place is no proof of receipt of the shipment. When Chip questioned the CCL driver, the driver admitted that when he was political campaign late with his deliveries, he simply dropped the shipment at the store promise and did not wait for the store managers signature. Chip has not reserved 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 phylogenesis of CCLs products were payd by a combination of capital invested by the brothers, slang funding, and a government grant (see financial statements, express 1). Scientific searchand Experimental Development (SR&ED) credits were received in 20X1 and 20X2 and have been describe as gover nment 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, based on the 20X1/X2 results, they expect the reliable product line to become a significant commercial success.The cost of developing this product line, called Walton Work Wear has been deferred and is being amortized (straight-line) at the rate of 10% per year starting in 20X2 (see Deferred Development Schedule, Exhibit 2). Original research cost for the Walton Work Wear products were expensed when incurred, net of grants and SR&ED credits. The prior-year audit saddle shows that this treatment of SR&ED credits is consistent with CCLs report of all taxes (payable and recoverable), which have been accounted for on a current basis without ask to recognition of the future tax effects of any current transactions.During the yesteryear year, the brothers have turned their atten tion to a moisture management 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 childbed away from the skin and minimizes the impact of perspiration on the clothing. The preliminary image works effectively for the first several minutes, but the protection restraint degrades quickly and more than work is required. This product line will be called Carroway Cool Top and is currently in the research stage only. The deferred schooling costs for this product line are $975,000.In auberge to finance completion of the new research and victimisation of the Carroway Cool Top products, Chip Carroway expects to obtain a long-term bank loan for CCL. He is assured 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 going public and issuing new shares to raise funds for future grow th. However, Chip is concerned about the implications of losing some control over CCL so he is leaning towards remaining a CCPC.CCLs chief financial 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 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 accessal 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 umpteen new employees in r esearch 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 threadbare 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. roughly 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 fount 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 judgment of dismissal of chemicals, and when their objections were i gnored they excited 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 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 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 man 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 font size of the list of additives employ in the fabric treatment so that there was more elbow 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 component 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 muster in financial st atements show positive net income and strong revenue, with a hazard 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 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, concomitant 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 f rom 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 usurp 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 addressed 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.