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ISSUES IN ACCOUNTING EDUCATION Vol. 27, No. 4 2012 pp.

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American Accounting Association DOI: 10.2308/iace-50206

Zoom Snowboards Incorporated: Understanding the Impact of Management Decisions on the Audit Plan
Joanne C. Jones
ABSTRACT: Zoom Snowboards Incorporated is a fictitious Canadian private company in the snowboard industry. While the company is fictitious, many of the facts are adopted from actual snowboard companies. The overall goal of this case is to give the students an opportunity to develop their ability to perform a rigorous analysis of an assurance case with multiple issues. Students assume the role of audit senior and are asked to prepare an audit planning memo for the partner. In order to perform a rigorous analysis, students will need to consider the broader issues related to business strategy, risk management, and corporate governance, as well as the regular components of an audit planning memo. Students will also need to consider how the various requests from client management, the bank, and the audit committee impact the financial statement audit as they are preparing their planning memo. Keywords: audit planning; audit risk; audit strategy.

INTRODUCTION ou are an audit senior of a public accounting rm and you have been assigned to the nancial statement audit of a rapidly growing private Canadian snowboard company, Zoom Snowboards Inc. Due to its rapid growth, the company is facing several challenges in its operations, nancing, internal controls, and corporate governance. In addition to preparing the audit planning memo, the partner has asked you to identify signi/cant business risks, internal controls, and accounting issues that he should discuss with the audit committee at its next meeting. The partner has also asked you to prepare a response to any specic client management requests. COMPANY AND INDUSTRY BACKGROUND Zoom Snowboards Inc. (Zoom) designs, manufacturers, and markets high-end customized snowboards. Bill and Emma Gage, husband and wife snowboard enthusiasts, founded Zoom in 1992. Zoom originally operated out of the Gages garage in Whistler (British Columbia) until 2000, when Bill and Emma purchased a manufacturing and retail facility and began full-scale production
Joanne C. Jones is a Professor at York University.
I thank Amalia Spensieri, Sandra Iacobelli, and Larry Yarmolinsky for their helpful comments on various versions of this paper, as well as anonymous reviewers, the discussant, and participants in the 2010 AAA Auditing Section Midyear Meeting. I also thank Elizabeth Clow for her research assistance and the professors who used this case in their classroom.

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of their snowboards. In order to nance the expansion, the Gages negotiated bank nancing and brought in a group of private investors. The Gages currently own 50 percent of the common shares, with the remaining 50 percent held by the private investors. Snowboarding is a winter sport that resembles surng on a ski hill. It draws mostly the under-30 crowd, with 85 percent of the snowboarders between the ages of 1224 years old, 75 percent male and 25 percent female (Heine 2010). Snowboarding became popular in the early 1980s and originally carried an image of being a rebel sport. By the early 1990s, it was the fastest growing sport and was clearly becoming mainstream (Heine 2010). In 1998, snowboardings mainstream status was conrmed when it made its debut in the Winter Olympics. It is a sport that continues to grow, especially in the male teenage segment. However, the spectacular 30 to 40 percent annual gains in industry sales of the late 1990s are long gone. As the sport becomes more and more mainstream, this creates challenges, especially for smaller producers like Zoom. Other cutting-edge sports, such as Telemark skiing and skateboarding, can leave snowboarding with a more conservative image and potentially dampen demand among its youthful demographic.1 In addition, snowboarders are getting older; and larger companies, with greater marketing resources and a wider range of products, have entered the market. Another recent challenge has been the impact of global warming on the snow season. Despite these challenges, Bill and Emma see a long and prosperous life for Zoom Snowboards. They are committed to the company and have no plans for an exit strategy. To order a custom snowboard, customers go to the Zoom website and select from various graphic designs and board models to put together their unique board. Unlike other companies that are in the custom snowboard market, what sets Zoom apart is its ability to design and deliver a board within one week. This delivery time is considerably less than the standard eightweek-minimum lead time offered by other custom brands. Zooms key to success is its patented machinery and graphic application process, and that it makes its own materials. In addition to fast production, Zoom is constantly experimenting with new materials and new ideas to further its passion to build the highest quality snowboards possible. As a result, it excels in prototyping and developing products. Since it is located in Whistler, a world-renowned ski destination with a long ski season, when a new prototype is developed, the developersall hardcore snowboarders (commonly referred to as riders)often go directly out to the slopes to try out the new model. Zoom also places great emphasis on customer feedback in its product development process. It is constantly getting feedback from customers, sales reps, designers, and Internet users to nd out what riders want. It also consults extensively with its Zoom Group, a collection of professional snowboarders who provide feedback on the style and performance of its products. Over the years, Zoom has been very successful in developing a reputation for being leading edge, not just in its products but also in its marketing strategy. For instance, all members of its Whistler-based customer service team are experienced snowboarders. When customers call in to get information or advice on particular products, they speak to a real rider who has used the products. Zoom has also been successful in increasing its prole through the sponsorship of many high-prole snowboarders, some of whom are Olympic medalists, and its 50 on-hill representatives who demonstrate the boards throughout North America. In addition, it was the rst snowboard company to have its own lm department in charge of producing snowboard lms, commercials, and blogs. Despite its original focus being customized boards, in the last few years, Zoom has been trying to ramp up and expand its product line. As a result, Zoom has experienced tremendous growth in a very short period of time. In 2008, it moved beyond offering only customized boards and began offering its most popular boards through specialized snow sports retailers. This wider distribution network led to
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Telemark skiing, which originated in Norway, has been around for quite some time. However, this form of a freeheel skiing, which is a combination of cross-country and alpine skiing, is growing in popularity. Younger crowds especially like it because of the thrill of the tele-turn and the adventure of backcountry skiing.

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a 30 percent increase in snowboard sales. Also in 2008, Zoom started its own Zoom outerwear clothing line. Zoom uses the same approach to developing its outerwear as with its snowboards. It uses only superior materials and relies heavily upon customer feedback. Zooms design team is committed to both superior technical and fashion details, and has created an outerwear line that can be worn as street wear as well as on the slopes. As a result, the Zoom outerwear line has been a great hit with both snowboarders and non-snowboarders. Demand for the outerwear has been so strong that it now represents 40 percent of Zooms total revenue. Given the dramatic increase in demand for Zoom snowboards and apparel, in November 2009, Zoom opened a sales and distribution facility in Montreal to better service its east coast market. Also in 2009, Zoom opened three more agship stores, in Vancouver, Toronto, and Montreal, to add to its original agship store in Whistler. Your rm, Grand and Hall, has been Zooms auditor since 2003. The primary users of the nancial statements are the bank, the investors, the board of directors, and Zoom management. It is now July 15, 2011, and you have been assigned the responsibility as audit senior for the companys October 31, 2011 audit. This is your rst year on the audit, so you are trying to get up to speed quickly since interim procedures have already been conducted. The partner in charge has told you that the Zoom board of directors has become very interested in improving its corporate governance. In 2009, when Zooms bank increased Zooms operating line, it noted that Zoom had a weak corporate governance structure. As a result, the board recruited new members and formed an audit committee. However, the board of directors still relies heavily upon Emma and Bill to keep them informed of the various issues and risks Zoom faces. The board is especially concerned since Zooms rapid growth makes it difcult to keep up to date. The board members feel that they should be more proactive in their role and investigate issues independent of the Gages input. As a result, they have requested that Grand and Hall attend their next audit committee meeting (in two weeks) and explain signicant business risks, internal control issues, and signicant accounting issues. The partner would like you to prepare an audit planning memorandum that addresses signicant engagement issues and specically identies the matters relevant to the upcoming audit committee meeting. In order to prepare the memo, you reviewed the nancial statements (Exhibit 1) and have consulted last years audit le (Exhibit 2), the partners notes from a recent meeting with Emma and the CFO (Exhibit 3), and ndings of the interim procedures (Exhibit 4). Required Using the background information from the case, as well as Exhibits 1, 2, 3, and 4, prepare the audit planning memorandum requested by the partner (refer to Exhibit 5 for an outline of how to prepare an audit planning memorandum). Be sure to address any other signicant engagement issues and consider the impact on the nancial statement audit. Also, ensure you highlight the key issues and risks that the partner should report to the audit committee at its next meeting. Please Note: In order to complete your planning memo, you are expected to perform both quantitative and qualitative analysis. You are also expected to research the relevant accounting and audit standards. Keep in mind that Zoom Snowboards is a Canadian company that follows International Financial Reporting Standards (IFRS),2 and Grand and Hall conducts its audits in accordance with International Standards on Auditing (ISA).3
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All public companies in Canada must follow IFRS. However, private companies like Zoom have the option of adopting Accounting Standards for Private Enterprises (referred to as ASPE) or IFRS. Although many private companies adopt ASPE because of its less onerous disclosure requirements, others choose to adopt IFRS for a variety of reasons. Some of the reasons may include: the company has foreign investors, creditors, or suppliers that are more familiar with IFRS; the companys major competitors use IFRS; the company is a multinational; or the company plans to go public in the near future. 3 The Canadian Auditing and Assurance Standards Board (AASB) has adopted International Standards on Auditing (ISA) as Canadian Auditing Standards (CAS).

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EXHIBIT 1 Selected Financial Information (in Thousands)

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EXHIBIT 1 (continued)

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EXHIBIT 2 Highlights of Your Review of 2010 Working Papers

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EXHIBIT 2 (continued)

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EXHIBIT 3 Partners NotesMeeting with Emma and Florence

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EXHIBIT 3 (continued)

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EXHIBIT 3 (continued)

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EXHIBIT 4 Excerpts from 2011 Interim Working Paper Files

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EXHIBIT 4 (continued)

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EXHIBIT 4 (continued)

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EXHIBIT 5 Guidelines for Preparing Audit Planning Memo

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EXHIBIT 5 (continued)

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CASE LEARNING OBJECTIVES AND IMPLEMENTATION GUIDANCE Overview and Learning Objectives Zoom Snowboards Inc. (Zoom), a privately owned Canadian snowboard company, produces snowboards, apparel, and videos. The case requires the students to prepare a planning memorandum for the engagement partner that also highlights key issues and risks that the partner should report to the audit committee. The students should immediately recognize that the engagement is high risk because the bank is performing a thorough review of Zooms operations, and there is a possibility that the bank will not renew its line of credit. Although this highlights that there may be a going concern issue, in order to perform a critical analysis of the issue, the students need to consider the broader issues related to managements aggressive growth strategy and its approach to risk management. The case also includes what appears to be employee fraud, and the students need to consider both its impact on the nancial statement audit as well as the clients request that the auditors perform a fraud investigation. Although misappropriation of assets is covered in ISA 240, The Auditors Responsibilities Relating to Fraud in an Audit of Financial Statements, this is an area that students have limited exposure to in most nancial audit courses.4 The overall goal of this case is to give the students an opportunity to develop their ability to perform a rigorous analysis of an assurance case with multiple issues. By successfully addressing the case requirements, the students will learn to:
   

   

Develop an understanding with international audit standards. Identify engagement factors affecting client business risk, auditor business risk, inherent risk, fraud risk, control risk, and detection risk. Link together client business risk, nancial reporting risk, and auditor business risk when evaluating an engagement. Formulate an audit strategy that reects the risk factors in the case. This strategy should consider both the overall audit approach, as well as the approach to specic high-risk accounts. Identify specic accounting issues and audit issues that need to be addressed on the engagement. In addition, given the number of issues, the students will need to be able to rank the issues and allocate the appropriate amount of attention to the issues according to their importance. Develop critical thinking skills that require issue identication, integration, and application of relevant knowledge and case facts, and reach decisions about appropriate course of action (in the context of an audit). Develop an understanding of the impact of client requests upon planning for the nancial statement audit. Prepare a comprehensive and rigorous analysis of the accounting and audit issues that focuses on the partners concerns. Develop a deeper appreciation of corporate governance and internal control issues faced by privately owned companies with strong founders. Develop written communication skills. Prepare an audit planning memo using proper grammar, structure, and language to explain to the audit partner the key risks and issues. The memo should also address client concerns.

In 2011, the equivalent American standard is SAS 99. ISA 240 and SAS 99 are essentially the same standard. In 2012, SAS 99 will become AU 240 (AICPA 2011).

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Implementation Experience and Instructional Guidance Although the company in this case is a hypothetical company, it is based upon the issues and experiences of several smaller companies in the snowboard industry. For instance, Burton Snowboards, as well as many others, started out of the owners garage (Dean 2006; Eng 2010). Also, Emma and Bills decision to implement wage cuts and to forego their salary due to economic pressures is exactly what Burtons owners chose to do in 2009 in response to the economic downturn (Transworld Business 2009). Zooms issues related to manufacturing in China, order lead times, and pricing also reect the actual challenges of the Canadian ski and snowboard apparel industry (Flavelle 2007; Poggi 2010). The brief background of the snowboard industry is adequate for the students analysis. If instructors wish to further their understanding of issues related to product development, marketing, and risk diversication, they can refer to Heines (2010) teaching case on Burton Snowboards, as well as the Burton website.5 This case may be used in either an undergraduate or graduate course in auditing and assurance. Four different instructors (including the author) of an advanced undergraduate auditing course at the authors institution have used the case. To date, the case has been used in 15 sections with an average class size of 40 students. The instructors have used this case in three different ways. First, it was used as a nal examination question. In this format, the students were given 105 minutes to read, analyze, and write their responses.6 Second, the case has been used as an out-of-class written assignment for which pairs of students prepared a planning memorandum and the case was discussed in class. A third and alternative way we used the case was to assign the case as advanced reading along with specic questions (mostly related to risk identication); the instructor led class discussion. When instructors took up the case in class, most allocated approximately one hour. If instructors decide to use this approach, we strongly suggest that the instructor require some sort of deliverable from the students in order to ensure that the students come to class prepared to discuss the case. A common method we used was to require the students to submit brief responses to the selected questions.7 What we did recently was use these brief responses as part of the students participation grades. (They demonstrate that they have come to class prepared.) In order to minimize paperwork and easily track student submissions, the students electronically submitted their analyses to a webbased submission system prior to class.8 We have also modied this approach and assigned the responsibility to lead the class discussion to one group. That group was also required to prepare a detailed written response to the specic questions and prepare a PowerPoint presentation.9 As in the instructor-led discussion, the other students in the class were expected to provide brief responses to the questions and electronically submit their analyses prior to class. When the case was used in this manner, the assignment (for the lead group) was worth 5 percent of their total grade. The remaining students in
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Other sources to use are websites such as Transworld Business (http://www.business.transworld.net), an action sports magazine; and the National Ski and Snowboard Retailers Association (http://www.nssra.com). For more background on return policies, instructors may wish to refer to Padmanabhan (1995). Finally, since the case raises issues related to corporate governance of privately held business with high involvement of the founders, instructors may wish to refer to Robinson (2007). The article provides some useful background on corporate governance in family owned businesses. The exam question (which did not include nancial statements) was part of a three-hour nal exam. Based upon the total marks allocated to the question, students were advised that the time allocation was 105 minutes. We use a rough guide of 2.5 minutes per mark; the total marks assigned for the question were 40 out of a total 70 for the entire exam. We have pre-assigned the questions in Appendix A. Instructors may also choose questions from the series of discussion questions provided in Appendix A of the Teaching Notes. We used the Gradebook function of Turnitin. Since we use cases in each class, each group in the class is given the responsibility to lead one case (as well as submit a written response to specic questions and prepare a PowerPoint presentation).

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TABLE 1 Breakdown of Grades


Final Exama Grade A B C D
a

Pair Assignmenta Number of Pairs 7 19 6 2 Percentage of Total Students 20% 55% 18% 6%

Number of Students 12 20 23 9

Percentage of Total Students 19% 31% 36% 14%

Results are for two sections.

the class were expected to participate in class discussion. We nd that when all students have read and prepared responses, class discussion is quite lively and engaged. After the group was nished with their presentation, the instructors took over the class discussion to ensure that all the key issues were covered. If instructors plan to use either of these formats, the directions and questions for the lead group assignment are presented in Appendix A. The focus of this assignment is mostly on the identication of risk and, in the case of the lead group format, oral communication of those risks. The questions we have developed do not focus on all of the accounting issues; however, instructors may choose to focus on different issues. Instructors may also choose to require all students to submit detailed responses to specic questions (either on a group basis or an individual basis) and the instructor leads class discussion. Based upon student responses and instructor feedback on the case, we have created a list of discussion prompts that other instructors can use to guide class discussion (included in Appendix A of the Teaching Notes). When used as a nal examination question and a pair writing assignment question, the case requirements asked the students to prepare the memo requested by the partner. The students had been exposed to several similar cases, and were provided with detailed guidance on how to prepare a planning memorandum, throughout the semester.10 To assist instructors in assessing student responses, an evaluation guide and a grading rubric are provided in the Teaching Notes. The evaluation guide is very comprehensive and is meant to provide a range of potential points that could be covered in a student response. Given the examination conditions, students were not expected to cover all the points. When the exam was set, the preliminary expectation of the maximum grade was 40 marks, which was considered reasonable, given the results (the highest score on the exam was 36 marks and the lowest was 21). The grading rubric provides a competency-based assessment for the cases key objectives and for the writing quality of the pair assignment. The breakdown of marks by letter grade, summarized in Table 1, demonstrates that the simulation (as either an exam question or a pair assignment) was sufciently challenging to differentiate the highly competent students from those who have not yet reached the desired level of competence. Experiential Feedback Student responses to the written pair and group assignment were positive. They particularly liked that they could relate the industry (one group of students brought in a snowboard when they
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In their course kit, the students are provided How to Analyze an Assurance Case, prepared by the author.

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TABLE 2 Student Feedback on Pair Assignment


n 51 Question
a

Mean SD Median 7.81 (1.37) 8.28 (1.10) 8.33 (1.47) 7.77 (1.62) 7.48 (7.2) 7.02 (1.53) 8.44 (1.26) 7.61 (1.54) 6.96 (2.05) 6.91 (1.56) 8.00 8.00 8.50 8.00 7.20 7.00 8.50 8.00 7.00 7.00

How much did the case help you identify factors that inuence engagement risk? How much did the case help you understand the inuence of the factors you identied on the level of engagement risk? How much did the case help you understand how to put together a planning memo? How much did the case help you understand going concern issues? How much did the case help you understand issues arising from revenue recognition? How much did the case help you understand issues related to corporate governance in small business? How much did the case help you understand the issues related to a fraud investigation? How much did the case help you understand the various issues related to special reports? How much did the case help you prepare for the midterm exam? How interesting was the case? Case Preparation How many hours did it take for you to complete your planning memo? Who Are You? Age Number of years university Completed a previous degreeb

12.67 (1.92) 10.00 25.7 (4.42) 24.5 4.74 (4.27) 4 47% (24 students)

a b

The questionnaire was based upon Davies and Salterio (2007) and Feltham et al. (2003). Our program offers a post-degree accounting certicate and is also open to students who wish to take courses on a visiting student basis in order to complete the course requirements of the accounting designation that they are pursuing.

did their in-class presentation). When the case was assigned as a pair assignment, 51 students in two sections (not taught by the author) completed an evaluation of the case. Students rated each case component on an 11-point Likert scale, ranging from 0 to 10. Table 2 summarizes the results.11 The students also indicated time to complete the case as well as their level of interest in the case. Since the students worked on the case in pairs, the average time to complete the case (12.67 hours) represents 6.33 hours per student. This time requirement met our expectations since it was the rst time the students completed a planning memo and the students were expected to research accounting and auditing standards in order to provide a good response. Students were asked the open-ended question: Would you recommend instructors at other universities use this case? Why or why not? Of the 51 students who answered the question, 46 (90 percent) said that they would recommend the case. As to why they would recommend the case, several students commented that the case was comprehensive and helped to understand course concepts. Others felt that the case was challenging and motivated them to research the accounting
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For various issues/learning objectives, respondents rated the case using a scale range from Unhelpful (0) to Helpful (10). Respondents also rated the case overall on a scale of Not Interesting (0) to Very Interesting (10).

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and auditing standards. The most common suggested improvement was to make the required more explicitseveral felt it was too vague. In this class, this assignment was the rst time the students had an opportunity to prepare a planning memo. In response to this concern, more guidance is provided on the partners expectations, and a detailed template for structuring a planning memo, based upon Early and Philips (2008), was developed and included in the case materials (Exhibit 5). Despite student concern over the vague requirements, most students felt that the case was great preparation for their midterm exam, which consisted of a non-directed case that required preparing a planning memo. TEACHING NOTES Teaching Notes are available only to full-member subscribers to Issues in Accounting Education through the American Accounting Associations electronic publications system at http:// aaapubs.org/. Full-member subscribers should use their usernames and passwords for entry into the system where the Teaching Notes can be reviewed and printed. Please do not make the Teaching Notes available to students or post them on websites. If you are a full member of AAA with a subscription to Issues in Accounting Education and have any trouble accessing this material, then please contact the AAA headquarters ofce at info@ aaahq.org or (941) 921-7747.

REFERENCES
American Institute of Certied Public Accountants (AICPA). 2011. Substantive Difference Between International Standards on Auditing and Generally Accepted Auditing Practices. New York, NY: AICPA. Davies, A., and S. Salterio. 2007. Financial Times business school rankings: A nontraditional assurance case in three parts. Accounting Perspectives 6 (1): 95113. Dean, J. 2006. It only looks easy. Inc. Magazine 28 (3): 112120. Earley, C., and F. Phillips. 2008. Assessing audit and business risks at Toy Central Corporation. Issues in Accounting Education: 23 (2): 299307. Eng, D. 2010. How I got started: Snowboard pioneer Jake Burton. Fortune (December). Feltham, T. S., F. Philips, and N. Sheehan. 2003. The same difference? A transfer pricing case. Issues in Accounting Education 18 (1): 97108. Flavelle, D. 2007. Sellers defend cost divide. Available at: http:/www.thestar.com/printArticle/271015 Heine, P. 2010. Burton snowboards: Origins and spectacular growth. Journal of Case Research in Business and Economics 2. Padmanabhan, V. 1995. Return policies: Make money by making good. Sloan Management Review (Fall): 6572. Poggi, J. 2010. How to trade retails rising costs. Globe and Mail (August 26). Robinson, G. 2007. Creating a governance system. CA Magazine 140 (5): 5153. Transworld Business. 2009. Burton reports salary cuts, 5% staff layoffs. http://business.transworld.net/ 14120/features/burton-announces-salary-cuts-5-staff-layoffs/

APPENDIX A INSTRUCTIONS USED FOR LEAD GROUP ASSIGNMENT Your group is assigned to lead the discussion on Zoom Snowboards Inc. The focus of your analysis is the risk assessment including identifying fraud risk factors, assessment of corporate governance including discussing internal control weaknesses, and discussion of the accounting and

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audit issues associated with the going concern and the non-refundable fee for rights. Below are some questions you are required to answer and hand in at the beginning of class. This assignment (the report plus presentation) is worth 5 percent. Your report should be between 24 pages (excluding any tables, gures, or charts that you prepare). Your oral presentation should be no longer than 15 minutes. Your presentation should cover the most important points in your report. You will be expected to handle any questions that the class asks. All your group members need to be present (otherwise they will not be given a grade for the presentation); however, you may choose as many members as you wish to present the material. Required 1. What are the key business risks that Zoom Snowboards Inc. is currently facing? Explain how those risks will affect nancial statement risk (FSR), explain the impact of FSR (i.e., is it pervasive or does it impact specic accounts and assertions), and discuss how the risks will impact the audit. (Use the table below to answer your question.)

2. Based upon your risk analysis, what is your conclusion on the risk of material misstatement at Zoom? (Explain, along with your calculation of planning materiality.) 3. Would Zoom Snowboards Inc. be considered a high- or low-risk engagement? What specic factors inuence your judgment? 4. Discuss the current state of the corporate governance at Zoom Snowboards Inc., and explain how this impacts your risk assessment. 5. Identify the various fraud risk factors that exist at Zoom Snowboards Inc. What is your response (as an auditor) to these risks? 6. Is there a going concern issue with Zoom Snowboards Inc.? If so, provide your support (consider both quantitative and qualitative factors) and your audit procedures to address this issue. 7. Discuss the accounting treatment (revenue recognition) of the $500,000 non-refundable fee for rights. Do you agree with the way this is being recorded in the nancial statements? What audit procedures would you undertake to audit this transaction? 8. Discuss the accounting issues surrounding the new refund policy initiated by Zoom. What assertions are you concerned about, and what audit procedures would you need to perform to assess the reasonableness of the accounting policy?

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