From: CPA

To: Audit Partner

Re: TTC Audit/accounting

As per your request.

Audit Plan

RISK – OFSL

We have identified the following risk factors:

• New entity and first time audit and so policies/procedures have never been examined
tested in the past which increased risk of errors
• Audit required for bank – provides incentives/bias for management (fraud CAS 240) to
show f/s that meet bank covenants
• We have identified several accounting errors – which suggests that book keeper not
competent – which increases RMM
• We have identified several internal control weaknesses – which increased risk of
fraud/error
• I/C control environment is weak as Tyler does not oversee;
• I/C appears lack of risk assessment process in place to id/respond to risk
• I/C – lacking/not monitored
Conclude: Risk of a material misstatement at OFSL is high. Will increase extent of audit testing.

MATERIALITY
Users – Dave/Tyler for making decisions and for determining bonus – earnings important
Bank – a primary user to assess loan – cash flow for repayment – interested in earnings

An appropriate base given the users interest in earnings would be pre-tax income from ops.
Typically select 3 to 7%. Will use 5% of $275,000 - $14,000 (may have to adjust for acct)

Performance materiality – Given high risk - - PM would be 60% of materiality - $8500

APPROACH
Given new company/client – (CAS315) we have to understand internal controls in order to
assess RMM and determine approach for accounts/assertions. This will have to be
documented.
TTC revenue expense stream is primarily made up of many small transactions. Ideally we
would like to use a combined approach in these areas.
Given that we have identified several i/c weaknesses and a weak control environment – this
year we will be using a substantive approach.

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Financial Reporting Issues And Related Procedures

Issue: Accounting for acquisition of trucks – RPT acquisition

Analysis: The purchase of the four trucks from BTT is a related party transaction (s.3840 .04(a))
because Tyler directly controls BTT and TTC. The trucks should be recorded on the f/s of TTC
as title has transferred. The accounting issue is at what amount should they be measured at.
They are currently recorded at $250K which is the amount paid.

Measurement is determined by 3840.06 (and RPT decision tree) and analyzed as follows:
1. Transaction is not in the normal course of business as neither BTT/TTC are in business
of selling trucks
2. The change in ownership is substantive (greater than 20%) because 30% of BTT is
owned by non-related.
3. The next decision is – Is the amount of the exchange supported by independent
evidence? It appears that it is not as it has been suggested fmv is in fact $300,000
Recommend/integrate – s. 3840.09 requires that the trucks be measured at the carrying amount
($200,000). The difference of $50,000 will be credit to equity.
This will reduce the amortization expense for PPE and increase profits

Audit procedure – Risk – RPT are not recorded at correct amount; Assertion PPE – Valuation
and allocation
Procedures. 1. Confirm with lawyers that BTT is owned 70% by Tyler and remaining 30% are
not related; 2. Confirm the carrying amount of trucks on BTT financial reporting; 3.
Contact/enquire -- expert valuator to determine fmv of trucks ($300K) to ensure correct
accounting

Issue: Required recording of exchange between zoo – animals for advertising

Analysis: This is a non-monetary transaction (s. 3831.05) because TTC is providing advertising
for the zoo (service) in exchange for them providing animals for customers to see (service) and
must be recognized.
s. 3831.06 requires that it be measured at fair value unless
a) transaction lacks commercial substance – it has commercial substance as impacts cash flow
(ticket sales)
b) transaction exchange is for similar – it is not as advertising and providing animals
c) cannot be measured – it can be reliabily measured ($2K)
d) it is not reciprocal – it is – zoo/TTC get service
Recommend/integrate – Advertising revenue and display expense need to be recorded. It will
not have an impact on net income. Possible amount – 6 cities x 4 days x $2K - $48K

Audit procedure – Risk – NMT transactions are not recorded or not recorded at correct
amount; Assertion – Rev/exp – Completeness; accuracy
Procedures. 1. Inquire/discuss with mgmt. of TTC (and possibly zoo). what FV of advertising
would be/ animal rental; 2. Confirm with zoo – providing of animals in various cities; 3.
Recalculate amounts for advertising

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Issue: Treatment of fire as a subsequent event
Analysis: This subsequent event conditions occurred after the end of the year and as required
by s. 3830 must be disclosed in the notes.
Recommend/integrate: The disclosure must be added by management and must detail the
nature of the event – including any related insurance funds anticipated. This will not impact
current year earnings.

Audit procedure – Risk – Undisclosed SE; Assertion – Presentation – completeness.

Procedures. 1. Verify book value of trailer and goods destroyed. 2. Review draft disclosures
prepare by management to ensure contain all HBK requirements. 3. Obtain/inspect insurance
policies to determine coverage.

Issue: Should the amount being claimed by the injured customer be recorded as a liability.
Analysis: s. 1000 defines a liability as an obligation; event has occurred and it can be measured.
A liability does not have to be a legal liability to be recorded. It can reflect a moral or
constructive obligation. In this case – one would need to assess the likelihood that
management will make a payment and if so, it should be accrued. It could also be considered
as a contingent event – likely, measure or possible disclosure..
Recommend/integrate: The amount should likely be accrued, net of any expected payments that
would be made by the insurance company. The amount should be shown as a “loss” as not
typical.

Audit procedure – Risk – Unrecorded liabilities; Assertion – Completeness of liabilities/losses.

Procedures. 1. Inspect correspondence with customer. 2. Confirm status of claim with
insurance company. 3. Send a legal letter with legal counsel to evaluate likelihood and amount.

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MANAGEMENT LETTER

Weakness: Tickets are pre-printed and are not unique

Implication: Tickets can be stolen or used multiple times by various customers. Result in non
payment for admission.
Recommendation: Manual – Tickets should be pre-printed and pre-numbered. Tickets
collected on entrance should be reconciled against revenues.
Automated – Tickets should be printed at the time of sale with a bar code that cancels the ticket
when a customer enters to prevent re-use.

Weakness: Customers can only pay cash.

Implication: Cash is much more likely to be misappropriated. In addition, you may be losing
customers that want to attend but can only use credit or debit cards.
Recommendation: Admission fees should be payable by credit card or debit card.

Weakness: Tickets are left intact when a customer enters.

Implication: Tickets could be reused by a friend or same customer on another day. They may
even be “resold” by employees.
Recommendation: Manual – Tickets should be collected (torn in half) when a customer enters.
Automated – Tickets with a bar code should be scanned on entrance. The scan should “cancel”
the ticket to prevent subsequent use.

Weakness: Computer access is not restricted; software is not protected.

Implication: Information stored on the computer can be accessed by various parties
(employees) and altered and potentially contaminated by a virus (etc.)
Recommendation: Computer used for accounting should be a separate unit and not accessible
by anyone other than those authorized. Should be password protected.

Weakness: Sales at concession booths and games are collected in cash with no reconciliation.

Weakness: Lack of control over food inventory.

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