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Pony Up Stables

Natalie Daguiam
Outline
Company:
- Small family business
- Acquired April 1, 2013 new management look for cut off issues to ensure they
did not try to look worse before and improve with new management
- Bank needs audited F/S
- Now: April 25th. 2014
- Draft FS: March 31st 2014

Role: Senior Audit


User of Report: Engagement Partner
Users of F/S: Bank, Owners
Other:
F/S in accordance with ASPE

Required:
Planning memo Engagement partner higher level of knowledge
procedures for significant areas
identify accounting issues
clients asked if there could be improvements in controls Recommendations
Note: all have separate jobs, do not seem to take a large managerial role. Related
party transactions may be an issue

Theme/Hook
- Issues with control testing
- Bias: Mrs. Devanney no one oversees her is the sole administrator who double
checks her work? Potential for fraud?
- ** ask for cash flow statement, bank account balances, related invoices bank
reconciliations, inventory count

Key/Critical Success Factors


- Other owners have similar interest business: veterinarian, animal galaxy and horse ride
instructor
- Horse Riding lessons and Stable rental industry
- Owners have other occupations and this is not their full-time focus

Date: April 25, 2014


To: PonyUp Stables
From: Senior Auditor
Subject: Audit Memo
The purpose of this memo is to highlight significant risk areas and outline accounting issues for
the 2014 Fiscal Year at Pony Stables. PonyStables reports in accordance with ASPE.

Revenue Recognition

Boarding Fee Revenue:


ASPE Revenue 3400:
o the seller of the goods has transferred to the buyer the significant risks and rewards of
ownership, in that all significant acts have been completed and the seller retains no continuing
managerial involvement in, or effective control of, the goods transferred to a degree usually
associated with ownership; and reasonable assurance exists regarding the measurement of the
consideration that will be derived from the sale of goods, and the extent to which goods may
be returned.
o 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.
The initial fee of $1000 should be allocated over the 24-month contract, as it relates to
the services provided over that period of time.
The monthly boarding fee revenue should be recorded as revenue the month it is
incurred/received.
Assertions:
o Cut-off ensure all transactions in appropriate period
o Occurrence
o Completeness
Audit procedures: Verify contracts, see monthly invoices and receipts, check bank
reconciliations

Horse Riding Revenue


Revenue should be recorded at the time of the service
Control of schedule to verify horses are only being ridden for 3 hours seems to
be being over-rided, there should be further checks in the control and more
people check and verify the schedule
CAS 315: A94 segregation of duties
Assertions:
o Occurrence
o Completeness
o Accuracy
Service Fee Revenue and Expense 3400 go through a/b/c and support with case facts
This revenue is similar to consignment should not be recording the full revenue and
remitting the expense should only be recording the $75 dollars of revenue ASPE
doesnt have strict rules on how to handle consignment revenue. However, should be
handled similar to IFRS 15 B77
Thus, there should be no Service Fee Expense, and the Service Fee Revenue should only
be $75 per month per frequent rider this will have no impact on NI but will have an
impact on total revenue and total expenses.
Assertions: Occurrence, Completeness and Accuracy
Gross vs Net agent since still getting the 350

Riding Lessons
Correctly did not record the revenue
Controls should be in place to ensure that correct amounts are collected from
customers
Assertion: Accuracy
Procedure: Check invoices and receipts to customers, reconcile receipts to customers
with cheques to instructors.

Overall, revenue recognition and internal controls governing cash and revenue accounts are
high areas of risk for PonyUp stables. It is recommended that PonyUp:
allocate the initial fee from boarding revenue across 24-month contract
Only record the $75 service fee revenue and remove the service fee expense
Implement stronger controls governing cash, revenue and calendar for riding schedule.

Non-Monetary Transactions: Shoeing Expense


ASPE Section 3831.06: When an entity is able to reliably determine the fair value of both the
asset received and the asset given up, the fair value of the asset given up is used to measure the
asset received unless the fair value of the asset received is more reliably measurable.
Exchange has commercial substance because cash flows increase by 5,200
The Shoeing Expense should be valued at the FV of what PonyStables gives up: $350 12
= 4,200 400*12 (daughter there for four year) = 4800
o If the shoeing expense is more reliably measured, it should be valued at
$100*4*25 =10,000
o 10,000-4800=5200
The expenses should increase by $4,200
Cash flows improve by 5200

Related Party Transactions Riding Gear


Sarah has 20% in Animal Galaxy control
Megan has a 40% stake in Animal Galaxy signigicant control
Sarah and Megan are related to each other (sister-in law) ASPE 3840.04: Members of
the immediate family of individuals described in (b), (d) and (e). (Immediate family comprises an
individual's spouse and those dependent on either the individual or the individual's spouse.)
o ASPE 3840: Related parties exist when one party has the ability to exercise, directly or
indirectly, control, joint control or significant influence over the other. Two or more parties
are related when they are subject to common control, joint control or common significant
influence. Related parties also include management and immediate family members (see
paragraph 3840.04).
o .29 - When a related party transaction is measured at the carrying amount, any difference
between the carrying amounts of items exchanged, together with any tax amounts related
to the items transferred, shall be included as a charge or credit to equity.
.29 not normal business Can account for it at the exchange amount or the carrying
amount go through the chart not normal operations, measured at carrying amount
Commercial substance and exchange amount is supported by independent
evidence exchange amount, not necessarily commercial substance because not
substantial change in cash flows
Therefore, the transaction should have been recorded the $14,000, not the $11,000
This will increase the expenses by $3,000
Can do either exchange or carrying out

Convertible Loans Saddle Stables


ASPE Section 3856.20 Acceptable methods for initial measurement of the separate liability
and equity elements of an instrument to which paragraph 3856.21 applies include the following:
a. The equity component is measured as zero. The entire proceeds of the issue are allocated
to the liability component. The less easily measurable component is allocated the residual
amount after deducting from the entire proceeds of the issue the amount separately
determined for the component that is more easily measurable. The sum of the carrying
amounts assigned to the liability and equity components on initial recognition is always
equal to the carrying amount that would be ascribed to the instrument as a whole. No gain
or loss arises from recognizing and presenting the components of the instrument
separately.
b. Section 3051 you can include it as an investment alternative discussion
The Convertible Loan should not be classified as Investments and instead should be
classified as Debt. It would be considered a loan receivable and under ASPE the equity
portion can be valued at $0.
PV of the loan receivable: $10,000, n=5, at 2%
o Broken up into loan receivable and interest revenue
o This should also be further classified as current assets and long term assets
o Upon conversion it will then be moved to equity Investments
Assertion: Classification
Procedure: can verify with Saddle Stables how they record the transaction

Assurance Internal Controls


CAS 315: A96 Control activities are the policies and procedures that help ensure that
management directives are carried out. Control activities, whether within IT or manual systems,
have various objectives and are applied at various organizational and functional levels. Examples of
specific control activities include those relating to the following:
a. Authorization.
b. Performance reviews.
c. Information processing.
d. Physical controls.
e. Segregation of duties.
Since Mrs. Devanney has significant control over financial reporting and cash deposits further
controls should be put in place to verify her work. Owners should thoroughly review bank
reconciliations and set up a better system for signing checks to ensure there are no duplicates.
By implementing segregation of duties, authorization and review procedures will decrease the
risk in these areas. Specifically, each cheque that is signed by the owner should be
accompanied by a related invoice and the cheque memo should include the invoice number to
ensure the invoice. Further, inventory checks should be done periodically for PPE and
inventory and office supplies to ensure that no personal expenses are included in PonyStables
expenses.

Other
- There is a large decrease in cash by 21.16%, a decrease in A/R 10.8% but a decrease in
Revenue by only 2%
- With Adjustments new NI would be roughly (12,863)

Inventory held for sale


ASPE 3031.7 Inventory course of business
Biological assets
3061.04 for PPE business income supply of services so classified as PPE not Inventory

should reclassify and depreciate impairment horses are tired