Reference no: EM132970578

Abracadara Bakeries (AB) makes bread and rolls in ten large factories across Canada. They primarily supply the restaurant industry with bread and rolls for daily consumption. In 2020 the pandemic and associated shutdown severely reduced its sales. For the year ended May 31 2020, sales were $32 million, but for the year ended May 31 2021, sales were only $18 million. Reducing the workforce and shutting two of its factories reduced costs but profits still fell from $4.8 million in fiscal 202 to a loss of $5.1 million in fiscal 2021. With working capital and equity depleting, AB arranged a loan of $10 million from the Bank of New Glasgow. The bank requires an audit of the 2021 results.

It is August 17, 2021, the last day of field work. The board of Directors will meet on September 7 to approve the financial statements and sign the loan documents. You the audit manager, have the following notes:

• AB uses ASPE as the basis for accounting
• During fiscal 2021, in addition to the permanent closures of two factories, the other factories were running at 60% of capacity down from 90% of capacity. Thirty percent of non-production employees were laid off across all administrative areas
• The two closed factories are still fixed assets while AB is trying to sell the land and building
• AB factories are unionized and the union launched a complaint with the Labour Relations Board that the factory closures should have resulted in severance payments of $2 million. AB disputed this but on July 30, an arbitrator ruled that those employees were due $1.2 million. Both the union and AB have thirty days to appeal ruling
• Inventory was reduced.
• Your new audit technician, Julie is still waiting for the bank confirmation but has completed the cash section based on May 31 bank reconciliation done by the client
• The lawyer's letter was returned and states that the only legal issue is an ongoing lawsuit from 2018. A pedestrian was injured in a collision with one of AB's delivery vans after that van was hit by a car running a red light. The other driver was charged and no-fault was assigned to AB driver. The pedestrian sued AB for $2,000,000. An offer to settle for $250,000 was rejected by the pedestrian and the matter will go to court once the courts fully open. The lawsuit is recorded in the notes but not in the financial statements as the final damage is unknown.

REQUIRED:

Problem a.) Calculate Materiality and justify your choice of calculation

Problem b.) List four areas above average inherent risk for this audit. Be specific as the possible effects on financial statements of identified risk.

Problem c.) Make your notes for areas of continued concern or issues to be discussed with the engagement partner.

Problem d.) Assuming that no material errors were found in the fieldwork, would you be prepared to issue an opinion at this point? Why or why not?