Integrative Case Study - Floral Impressions Ltd
You are an auditor employed at B & B Accountants. On November 20, 2016, the partner in your firm sends you the following email:
Our firm has been reappointed auditors of floral impressions ltd. (FIL) for the year ending December 31, 2016. I met with the president and major shareholder of FIL, Liz Yamani, last week, and I toured the Vancouver warehouse and head office. I have prepared the following background information on FIL for you to review:
• FIL, a small public company listed on a Canadian stock exchange, is a wholesaler of silk plants with three warehouse located in Ontario, Alberta and British Colombia. It imports its inventory of silk flowers and accessories from Indonesia. FIL employee arrange bouquets, trees, wreaths, and decorative floral products fro sale in Canada to flower shops, grocery stores and other retailers. The silk-plant concept was novel when FIL was incorporated in 2001. For the first three fiscal years, sales grew approximately 40 percent per year, and FIL expanded to meet the demand. However, increased competition resulted in declining sales and operating losses over the next six years.
• Liz inherited the shares of the company in 2014. She had just completed a marketing course and was very excited about becoming involved in the business and applying her new skills. The fiscal year ended December 31, 2015, brought a return to higher sales levels and a modest net income. Liz's management contract, which was renegotiated in 2015, provides for stock options to be granted to her each year based on the percentage increase in FIL's revenue from one year to the next. On October 31, 2016, Liz was granted stock options for the first time. She received 4,500 stock options at $2.25 each, the market price on that date.
• To gain greater exposure on the Internet, FIL is developing its on website. FIL will pay for the costs of running the site by selling advertising spots on the site to home-decorating companies. So far, FIL has pre-sold 10 spots for $200 each. The advertisements are to run for one month. Unfortunately, the site delays have caused some advertisers to cancel their contracts. Others are threatening to cancel their contracts unless FIL gets the site up and running within the next month. The controller has recorded the advertising revenue as sales.
• Craig Olthuis was hired by FIL in September 2016 as the controller. FIL's previous controller resigned in June 2016 due to illness, and the accounts payable clerk temporarily filled the position. Craig anticipates that he will have all year-end information ready for our audit team by march 15, 2017.
• Historically, FIL's sales are highest during February and March, and from August to October. Exception of five large chain store customers that account for approximately 40 percent of the total accounts receivable. The allowance return typically has been 1 percent of fourth-quarter sales.
• During the year, management negotiated an operating line of credit with a new financial institution. The amount authorized is limited to 75 percent of the accounts receivables under 90 days old and 50 percent of the inventory, to a maximum of $2 million. The loan bears interest at prime plus 3 percent. Under this agreement, FIL is required to provide audited financial statements within 90 days of its fiscal year end.
Required:
(a) What are the two primary audit assertions B & B accountants should be concerned with regarding the accounts receivable of FIL?