Reference no: EM133107767

Question - You are performing the first-time audit of Dave's Paints Inc. (DP), a chain of paint stores in Western Canada. Dave Thomas is the sole shareholder of the privately-held company and is looking to expand by either finding another investor or obtaining a bank loan. For that reason, he has decided to have a financial statement audit conduct on his company for the first time in its history.

Dave is very proud of the company he has built and takes pride in being very involved in the business. He knows all store employees by name and in most cases was the one who interviewed and hired the employee.

As a result of COVID-19, Dave's stores were closed for most of April 2021- July 2021. This had some impact on the policies and procedures at his stores.

You are sitting down with Dave to understand DP's processes to help complete planning work on the audit (fiscal year ending May 31, 2022). As part of this discussion, you learn the following:

1. The same policies and procedures are in place at all DP locations. While these are not documented, Dave often speaks with store managers and identifies any corrective actions that need to be taken with that store's operations. Each store has a manager, assistant manager and a number of part-time or full-time sales associates.

2. The company had an IT administrator who has been on maternity leave for most of the past year. Whenever IT issues come up at a store, Dave hires a contractor to go onsite and solve the problem. Dave has therefore had to provide the IT administrator username and password to each store manager to share with the IT contractor.

3. Each morning the assistant manager is responsible for counting the cash collected from the previous day store sales and deposit it into DP's bank account. The assistant manager is also responsible for recording the total amount of cash collected in a daily e-mail to the accounting department that also identifies the credit and debit card receipts from the previous day.

4. DP's customers are a mixture of individuals and small businesses (generally contractors who perform residential and corporate painting services). While Dave cannot compete on price with the national chains that sell paint, he focuses on providing superior customer service to keep customers coming back. For example, Dave offers all business customers a 30-day interest free grace period to pay for their purchases. This is offered to any business customer who requests it. While Dave has not had any issues in the past collecting from these customers on time, Dave is a bit concerned if that will change going forward.

5. When a customer is paying for their order, they are asked if they want to open up a customer profile at DP's. This involves leaving some personal information such as the customer's name, address and e-mail address. These customers are alerted whenever a special or promotion is occurring at the store. This information is accessible through the sales system, which all staff have access to.

6. The price for all paint and other inventory is fixed based on the master price listing approved for all stores. Changes to these prices can only be done by store manager override. The only exception to this is a 20% staff discount code to all items that staff can enter for any goods that they purchase for personal use.

7. The assistant store manager prepares a store inventory listing every other week based on the previous inventory record last created, reduced for all inventory sold during the previous two weeks. This is submitted to head office and as part of a bi-weekly store managers call is used to determine what stores need additional paint purchased or if there is a benefit in having a store transfer unsold inventory to another store.

8. DP does not have an advertised refund or exchange policy, however their goal is to make every customer satisfied. It is up to the store manager's discretion to allow for paint to be returned for a full refund or exchange with another product. This can occur even if the paint was opened but based on physical inspection was not used. In these cases, the managers send an e-mail to Dave to identify the details of the exchange or refund. The returned paint is also put back on the shelf.

Required - Provide four draft management letter points discussing internal control weaknesses (including impact of the weakness and recommendation for improvement) for inclusion in the management letter to DP.