Enterprise Tech Systems (90 MIN)

Outline
Now: August 15th, 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 issues in June 30, 2013 YE
3. Evaluate effectiveness of the controls and explain how they might affect the audit

Accounting issues:
- 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)
- 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.

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
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 making 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.