AutoPlus Automotive Parts and Accessories Manufacturing Inc.
Rita Quong has been running AutoPlus Automotive Parts and Accessories Manufacturing Inc. (AutoPlus) since her father died 10 years ago. At that time, the company had 150 employees, healthy annual revenue of over $4 million, and was considered a leader in the field of automotive tools, dies, and machining parts. Rita's father had extensive contacts in the business community, and his death resulted in AutoPlus's financial results decreasing from a net income of $495,000 per year to a loss of $300,000 two years later. The number of employees shrank to 95.
At that point, Rita called in Shirley Thong, a CA at her local accounting firm, for ongoing help in managing the business.
Over the ensuing two years, the unprofitable tool- and die-making business was sold for very little proceeds to one of the operational managers who started a separate company. The quality control manager left and her monitoring responsibilities were assigned to a shift supervisor. The controller's position was replaced with a full-time bookkeeper, and the departing controller accepting a severance settlement. The bi-weekly payroll was outsourced to the bank, with data entry done online using a web based interface. An accountant from Shirely's accounting firm still goes to AutoPlus once a month to assist in the preparation of the monthly financial statements. These staffing changes, together with more careful management of quoting and costing, resulted in a rapid turnaround. Shirley, now retired from the accounting firm, still maintains contact with Rita.
AutoPlus now has 65 employees, operating in one shift, and the most recent financial statements show revenue of over $5 million. (See Exhibit 7-1.) Two new shareholders contributed capital seven years ago and collectively own 40% of the company. In addition to capital, these new shareholders provided management advice and had plans to take AutoPlus public on the Toronto Stock Exchange by next year.
Ambitious sales targets and a marketing plan were being developed to strengthen financial results, but when the automotive sector was hit with a significant economic downturn, the plans for going public were put on hold. Those plans will be revived when the company's profits improve. In the meantime, the company expects that unqualified audit opinions will be needed to support its future plans.
AutoPlus uses a CAD/CAM (computer-aided design and manufacturing) system for many drawings and pricing proposals. All supervisors and managers use the system. In particular, there are three large customers who require all proposals to be in a standard format. In the last year, those customers mandated that AutoPlus use EDI (electronic data interchange), and now all business with these customers is done using EDI. AutoPlus receives purchase orders and receiving documents from these companies electronically, and sends invoices and shipping documents via EDI. Payments are received via electronic transfer 10 days after the goods have been received and approved by these customers.
To minimize overhead costs and to avoid implementing a second shift, which would not operate at capacity, AutoPlus outsources any work that would require a second production shift. This allows AutoPlus to employ only the number of employees needed to operate one shift at full capacity. This has made AutoPlus more resistant to fluctuations in different industries, as internal work can be shifted to
outside contractors as necessary.
The current trend is a disastrous drop in the automotive area. No new purchase orders have been received in the automotive sector in the last six months, and many pre-existing purchase orders were cancelled. To compensate for this downturn, AutoPlus has been able to shift somewhat into health care and computing technologies. Exhibit 1 shows that AutoPlus's financial results have worsened considerably due to the drop in automotive revenues and its acceptance of new customer orders with smaller margins. Rita is adamant that the automotive accounts receivable will not be written off, however, as she is expecting collections in the coming year and an improvement in the automotive sector.
On the sales front, Rita is facing a difficult decision with respect to her brother, Allan, who joined the company as a salesperson last year. This is explained further in Exhibit 2. Allan seems to be having difficulty obtaining solidly profitable jobs for the company and Rita is not sure whether he should be kept on with the company as a salesperson. She has discussed this with Allan, and they have agreed that the competition for non-automotive jobs is fierce as manufacturing companies of all sizes struggle to survive.
It is early June 2015. You, CPA, are responsible for the AutoPlus audit planning for the May 31, 2015 audit using the audit risk model. This is the second year that AutoPlus' financial statements will be audited by your firm. The audit partner responsible for the engagement would like an assessment of the impact of the information systems on the risks of the engagement as part of the audit planning process.
In particular, he would like a thorough assessment and impact evaluation of the controls over the new EDI and inventory management systems, and the testing that is required in response to the impact of a computer virus that AutoPlus discovered yesterday. (See Exhibit 2.) He would like you to identify specific actions that you will undertake to assess the bad debt allowance (currently set at 10% of accounts receivable, as in prior years), and the net realizable value of inventory.
Required
Write the documentation for the engagement partner that includes (1) a planning memo for the financial statement audit as requested by the partner, including your assessment of any issues that could prevent the issuance of an unqualified audit opinion, and (2) a memo assessing the issues raised by Rita for the partner to discuss with the client.
Attachment:- Assignment.rar