Auditing Case Study Assignment Question
You are a senior audit manager for Martin, Argiro and Bukrinsky LLP (MAB LLP) assigned to audit Calm Teas Inc., (CTI). CTI operates a chain of tea shops in the GTA. They are owned as a cooperative and got their start as an outlet for fair-trade tea. Fair trade means the tea leaves farmer is paid more than if they sold their tea leaves on the open market. The expectation is that the extra money will help the farmer’s community improve economically.
The major national and international tea shops also stock fair trade tea, but only as a specialty. Nonetheless, CTI has been able to compete on price and has managed to open 19 locations. Part of the reason CTI can compete is that they have partnered with local agencies that represent communities that are typically underemployed to provide employment to these residents. This social justice strategy has kept their labour costs low as a result of government subsidies. They also have lower rent costs since their locations tend to be in less desirable locations.
Currently, CTI is experiencing an identity crisis. Some of the board members, who are all volunteers, feel CTI is too profitable and has lost its way as a tool for social change. Others members have been impressed with the success so far and want to bring in professional management and then expand nationally. The industry as a whole is growing at roughly 12% per year.
In order to prepare itself for possible expansion which will require a line of credit at a minimum, but more likely a longer-term bank loan, the CTI board has voted to have the financial statements audited. Trevor Saltzman, CTI’s now former Accounting Manager, prepared these statements in the past. He studied business in college and began pursuit of an accounting designation but did not complete it. Before he left CTI, Trevor complained that he did not have enough staff for a $23 million business and left this past year to pursue other opportunities.
Trevor’s key assistant, Katharine Wan, was promoted to Accounting Manager but her position was not replaced. As a result, in addition to her current duties as manager, Katharine still reconciles the weekly cash reports from each store and enters them into the weekly sales journal. She had to suspend her own accounting studies due to the pressure and corresponding time constraints of her expanded role.
Since most of the tea shop receipts are in cash, each store location deposits the cash twice a day – around 10 am and around 11 pm after the 10 pm closing. Except for two locations, these accounts are then flushed by the bank into a centralized deposit account controlled by head office. There is no branch of the bank near the other two locations so they make their deposits to a different bank. Each week, after reconciling the cash reports, Katharine writes a cheque co-signed by the executive director to move the money into the main bank account.
Cash reports are done weekly showing product sales, cash deposited and “tea card sales”. Tea cards are prepaid cards favoured by some customers over cash. They are recognized as revenue when sold since they are non-refundable. Approximately 10% of sales at the counter are on the cards which have no expiry date. Katharine reconciles the cash reports to the bank transfers and also reconciles each account on a monthly basis.
CTI’s executive director has engaged MAB LLP to perform the audit. As the senior manager you are the main point of contact for the client and for your preliminary audit plan you must assess the risks of this engagement. Prepare the report.