PONYUP CASE 

 
 
 

Issue  Implied Analysis  Time Budget 

Introduction   ● Overview of role and required.  15 mins 

  ● Overview of PonyUp Inc. (history, reporting method)   
● Incentives and biases of parties involved. 

Boarding fee  ● Revenue recognition criteria for whether the initial $1000 fee  15 mins 
revenue   should be recognized immediately (ASPE 3400) 
(MAJOR)  ● Risk of aggressive revenue recognition. 
  ● Substantive testing required 

Roof Repair  ● Determine whether the $35,000 roof repair cost should be  15 mins 
(MAJOR)  classified as an expense or a betterment of PPE (ASPE 
3061) 
● Possible misclassification and implication of error. 
● Substantive testing required 

Supplies &  ● Classification of horses → Inventory or PPE? (ASPE 3031)  10 mins 

Horse Inventory   (ASPE 3061) 
(Minor)  ● Classification of food and supplies → Inventory or PPE? 
(ASPE 3031) (ASPE 3061) 

Risk  Risk level: High   

Assessment  ● Poor internal controls  20 mins 
  ○ Separation of duties 
  ● Possible fraud from Mrs. Devanney 
● New acquisition risk 
● Prior financial troubles  

Conclusion   ● Overall financial statement risk: high  15 mins 

 
 FINANCIAL REPORTING ISSUES

BOARDING FEE REVENUE

Issue: ​PonyUp charges a non-refundable initial fee of $1000 to customers looking to board their
horses. The initial fee is followed by a monthly boarding fee of $350 for the first 24 months and $400
per month after. The relevant financial reporting issue is revenue recognition.

ASPE 3400
.04 Revenue from sales and service transactions shall be recognized when the requirements as to
performance […] are satisfied, provided that at the time of performance ultimate collection is
reasonably assured.

.06 In the case of rendering of services and long-term contracts, performance shall be determined
using either the percentage of completion method or the completed contract method, whichever
relates the revenue to the work accomplished. Such performance shall be regarded as having
been achieved when reasonable assurance exists regarding the measurement of the consideration
that will be derived from rendering the service or performing the long-term contract.

.07 Performance would be regarded as being achieved under paragraphs 3400.05-.06 when all
of the following criteria have been met:
(a) persuasive evidence of an arrangement exists;
(b) delivery has occurred or services have been rendered; and
(c) the sellers’ price to the buyer is fixed or determinable.

Analysis:
The revenue recognition criteria is ​not met.
● Persuasive evidence of an arrangement exists, as a contract is signed at the beginning of the
boarding period.
● PonyUp’s price to the buyer is fixed and determinable at $1000.
● The services have not been completely rendered. PonyUp provides food, care, and stall rental
over the course of 24 months, so the $1000 initial fee does not cover any service that has
been completed upon signing the contract and paying the fee. Rather, the risks and rewards
relating to the $1000 are transferred over the 24 months of the contract.

Recommendation:
● The $1,000 initial fee should have been recognized as deferred revenue and recognized over
the period of the entire contract (24 months) at $41.66 per month.
● The $350 monthly boarding fee should be recognized on a monthly basis until the 24 month
long contract expires.
● IMPACT: ​Revenue will decrease in the current period and a deferred liability will be
recognized which will reduce the attractiveness of the financial statements to the owner and
the bank.
Audit Procedures:
● Risk: ​revenue from the initial $1000 fee may be recognized prematurely.
● Assertion:​ occurrence and accuracy of revenue / completeness and valuation of the deferred
liability.
● Procedures:
○ Obtain the contract with the customer to determine if any services are provided
up-front that would warrant a portion of the revenue being recognized immediately–if
there is no service provided up front then no revenue should be recognized.
○ Select a random sample of contracts and examine the date the customer takes
possession of the horse stall → this would confirm the date to start recognizing
revenue.
○ Calculate the amount of revenue to be recognized monthly based on the amortization
of the initial fee and the monthly boarding fee.

ROOF REPAIR

Issue: ​A snowstorm damaged the barn roof which cost $35,000 to repair. The repair includes
replacing several shingles which carry a 50-year warranty. Prior to the repairs, the barn roof was 25
years old and was showing signs of wear and tear. It was expected to require repairs in the near
future. The repair expense was recorded as a miscellaneous expense.

ASPE 3061
.03 (a) Property, plant and equipment are identifiable tangible assets that meet all of the following
criteria:
(i) are held for use in the production or supply of goods and services, for rental to others, for
administrative purposes or for the development, construction, maintenance or repair of other property,
plant and equipment;
(ii) have been acquired, constructed or developed with the intention of being used on a continuing
basis; and
(iii) are not intended for sale in the ordinary course of business.

.04 Property, plant and equipment shall be recorded at cost.

.14 The cost incurred to enhance the service potential of an item of property, plant and equipment is
a betterment. Service potential may be enhanced when there is an increase in the previously
assessed physical output or service capacity, associated operating costs are lowered, the life or
useful life is extended, or the quality of output is improved. The cost incurred in the maintenance of
the service potential of an item of property, plant and equipment is a repair, not a betterment. If a cost
has the attributes of both a repair and a betterment, the portion considered to be a betterment is
included in the cost of the asset.

Analysis:
The roof repair ​meets ​the criteria for Property, Plant, and Equipment (PPE)
 ● The barn is maintained for rental to others, the barn has been constructed with the intention of
being used on an ongoing basis, and the barn is not intended for sale.

A portion of the roof repair​ meets​ the criteria for PPE betterment.
● The old barn roof was 25 years old and was expected to require repairs in the near future.
From this, we can estimate that the expected lifetime of the old roof was approximately 25
years.
● The barn roof was repaired using new shingles which were specified to be high end and carry
a 50-year warranty. The new shingles are of much higher quality than the old shingles and
have double the shelf (approximated by the 50-year warranty).

Recommendation:
● Because the old barn roof already needed repairs, the $35,000 repair cost has attributes of
both a repair and betterment. Thus, the portion of the repair cost pertaining to betterment of
the roof should be capitalized. The portion of the repair cost pertaining to the maintenance of
the roof should be recognized as an expense. Because the new shingles have double the
expected life of the old roof, we can capitalize $17,500 of the repair cost to the new roof and
expense the other $17,500 as a maintenance expense.

Audit Procedures:
● Risk: ​that the roof was erroneously recorded as a miscellaneous expense rather than
expensed and capitalized to the appropriate accounts
● Assertion: ​accuracy of the expense and PPE accounts
● Procedures:
○ Evaluate the expected life of the old barn roof to determine whether the $35,000 repair
cost has attributes of a repairment, betterment, or both.
○ Evaluate the extent to which the roof repair is expected to improve the roof in terms of
expected life, output, and capacity.

INVENTORY

Issue: ​PonyUp owns all of their horses. The horses are available for clients as a ride but are also
available for sale at any time. The horses were recorded as inventory, but this is not the appropriate
classification. Food and supplies were also recorded as inventory.

ASPE 3031
Inventories are assets:
(i) held for sale in the ordinary course of business;
(ii) in the process of production for such sale; or
(iii) in the form of materials or supplies to be consumed in the production process or in the
rendering of services.

ASPE 3061
.04 Property, plant and equipment shall be recorded at cost.

Property, plant and equipment are identifiable tangible assets that meet all of the following
criteria:
(i) are held for use in the production or supply of goods and services, for rental to others, for
administrative purposes or for the development, construction, maintenance or repair of
other property, plant and equipment;
(ii) have been acquired, constructed or developed with the intention of being used on a
continuing basis; and
(iii) are not intended for sale in the ordinary course of business.

Analysis:
The horses ​do no​t meet the criteria for inventory. They​ do​ meet the criteria for PPE.
● The horses were primarily acquired for rental purposes. Even though the horses may be sold,
the original intent in acquiring them was not for resale. This means that the horses were not
intended to be sold in the ordinary course of business and thus they should be classified as
PPE.

Recommendation:
● Because the horses are classified as PPE, they should be recorded at cost. The horse sold
two years ago should also be recorded at cost.
● Food and supplies includes items used in the stables. These were appropriately recorded as
inventory and meet the criteria as inventory.

RISK ASSESSMENT

LEVEL: HIGH

Risk Factors:
● Poor Internal Controls
○ No segregation of duties: Because Mrs Devanney does both the scheduling and the
bookkeeping, there is no way of verifying the accuracy of the information.
○ It would be possible for Mrs. Devanney to steal payments received and adjust the
accounting records to conceal the theft.

● Recent acquisition
○ PonyUp had recently been acquired.
○ The business had been facing losses for several years

● Experience level of staff

○ The bookkeeper, Mrs. Devanney, has limited accounting experience
 ● Complex Transactions
○ There are several complex transactions that were erroneously treated.
○ There were several major errors that may impact whether PonyUp can maintain their
bank covenant

Due to the poor internal control and the limited experience of the accounting staff, the financial
statements are unlikely to be complete and accurate. Therefore, both the risk of material
misstatement and the audit risk are very high