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CO12101E IP07 Problem

- Wooden Toys Inc. manufactures wooden toys and discovered accounting issues during its recent audit for the year ending December 31, 2020. These issues include discontinuing the wooden bicycle segment at a loss, a fire in February 2021 that damaged property, and manufacturing assets being depreciated incorrectly. - The auditors also identified weaknesses in Wooden Toys' capital asset procedures, including a lack of approval and requisition processes for purchases and improper asset recording and tracking. The CFO asked the controller to analyze the issues and provide recommendations to improve controls.

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1K views4 pages

CO12101E IP07 Problem

- Wooden Toys Inc. manufactures wooden toys and discovered accounting issues during its recent audit for the year ending December 31, 2020. These issues include discontinuing the wooden bicycle segment at a loss, a fire in February 2021 that damaged property, and manufacturing assets being depreciated incorrectly. - The auditors also identified weaknesses in Wooden Toys' capital asset procedures, including a lack of approval and requisition processes for purchases and improper asset recording and tracking. The CFO asked the controller to analyze the issues and provide recommendations to improve controls.

Uploaded by

Haydee
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 4

Core 1 — Integrated Problem 7

Scenario (120 minutes)


You, CPA, are the controller for Wooden Toys Inc. (WTI), a company that manufactures
wooden toys for toddlers. The company prides itself on producing high-quality toys
made with sustainable wood sourced from well-managed forests.

During a meeting, your boss, Anita Pulitzer, CFO, provided details on some accounting
issues that were discovered during the recent audit work (Appendix I). She would like
you to provide an analysis of these issues, which she will use to corroborate the
auditors’ proposed adjustments to the financial statements for the year ending
December 31, 2020. WTI reports its financial statements in accordance with Accounting
Standards for Private Enterprises (ASPE).

Anita also mentioned that the auditors provided her with a memo outlining concerns
related to several weaknesses with the capital asset identified during the year-end audit
(Appendix II). Anita would like to take this opportunity to improve WTI’s processes and
controls because she must approach the bank next month to obtain additional financing.
She would like to prove to the bank that WTI is well run. She is hoping that next year’s
audit will require no adjustments to the financial statements.

Task #1

Provide Anita with a memo discussing the accounting issues identified in Appendix I.

Your response should be no longer than four pages, excluding any Excel files.

Task #2

Anita would also like you to explain to her the implication of each control weakness
identified and provide a recommendation. She wonders if these weaknesses had any
impact on the financial accounting errors identified by the auditors.

To prepare this analysis, she asked you to use the following table structure:

Weakness Implication Recommendation

Your response should be no longer than three pages, excluding any Excel files.
Chartered Professional Accountants of Canada, CPA Canada, CPA
are trademarks and/or certification marks of the Chartered Professional Accountants of Canada.
© 2021, Chartered Professional Accountants of Canada. All Rights Reserved.

Les désignations « Comptables professionnels agréés du Canada », « CPA Canada » et « CPA »


sont des marques de commerce ou de certification de Comptables professionnels agréés du Canada.
© 2021 Comptables professionnels agréés du Canada. Tous droits réservés.
2020-10-07
Core 1 — Integrated Problem 7 Problem

Appendix I
Accounting issues

Wooden bicycle segment

Restructuring during the fiscal year led to the decision to discontinue the wooden
bicycle segment, on November 20, 2020. This segment represents a major line of
business. Relevant information about this decision is as follows:
• The segment incurred a loss of $283,500 for the year.
• Estimated costs to dispose of the segment are $300,000. A broker has been hired
for the transaction and the assets of the segment are currently advertised at prices
that reflect WTI’s best estimate of fair value.
• At the time the board decided to dispose of the segment, the fair value of its
property, plant, and equipment (PP&E) was estimated to be $7 million and the
carrying value of PP&E was $7.9 million. When this analysis was performed,
management was surprised to find that many fixed asset acquisitions over the past
couple of years were not prudent. Some assets had been purchased at excessive
prices and others had been utilized far below capacity.
• Carrying value of current assets and all liabilities were equal to fair value. Fair value
estimates did not change between November 20 and December 31.
• The income tax rate for WTI is 30%.

WTI wrote down the PP&E to $7,000,000 in the 2020 financial statements. The
$900,000 loss is reported under “other income and expenses” on the income statement.

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Core 1 — Integrated Problem 7 Problem

Appendix I (continued)
Accounting issues

Fire damage

On February 1, 2021, a fire broke out in one of WTI’s manufacturing buildings. By the
time the fire was contained, there was significant property damage and some
manufacturing assets were unrecognizable. WTI’s management has spent considerable
time trying to figure out what was lost in order to quantify and support a claim for
insurance purposes.

Nothing has been reflected in the 2020 financial statements because the event occurred
well after year end.

Depreciation

During December, when depreciation expense was being calculated, it was discovered
that several manufacturing assets had been coded to the wrong general ledger account
by the accounts payable clerk in the prior fiscal year. The assets had a total cost of
$100,000 and, based on being coded as furniture and fixtures, were being depreciated
straight-line over 10 years. WTI claims a full year of depreciation in the year of
acquisition.

After detecting the issue, management recorded depreciation expense of $30,000 on


these assets in 2020 because manufacturing assets should be depreciated straight-line
over five years at WTI. This means the cumulative depreciation is now $40,000, as
required, and the assets are reported at net book value of $60,000. As changes in
depreciation are treated as changes in accounting estimates, the change was made
prospectively and there was no need to adjust the prior period financial statements.

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Core 1 — Integrated Problem 7 Problem

Appendix II
Control issues identified
Prepared by M&C LLP

Memo

To: Anita Pulitzer


From: Dustin Reed, Murray and Chan LLP
Subject: Internal control issues

It was great speaking with you yesterday. As I mentioned, we are still finishing up our
audit work for WTI. As such, I haven’t had a chance to formally provide you with a
management letter. However, as you requested, I have outlined the control issues we
identified during our audit.

The weaknesses relate to your procedures around capital assets.

Capital asset cycle:


• Middle-level management is able to approve asset purchases up to $5,000.
• There is no formal asset requisition process.
• Managers are able to order items as they see fit. The managers noted that many
fixed asset acquisitions over the past few years have not been prudent. Some
assets were purchased at excessive prices and others have been utilized far below
capacity.
• The person who initiates a capital asset order also approves the related supplier
invoice.
• The accounts payable clerk determines in which account to record capital asset
purchases. It was discovered that several manufacturing assets were coded to the
wrong general ledger account by the accounts payable clerk in the prior fiscal year.
• No capital asset schedule is maintained.

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