Caitlyn Pierce and Steve River are the two founding audit partners for Higgins and River LLP (H&R). In June 20X6, they accepted a new audit client, Baby’s Edge (BE), a private enterprise owned by two sisters, Kathleen and Christine.

BE’s mission is to provide eco-friendly and sustainable baby products to parents throughout eastern Canada. BE works with local and international manufacturers to buy environmentally friendly products at the best prices possible. BE’s owners pride themselves on their ability to provide “affordable eco-freshness.” BE’s head office is in Halifax, Nova Scotia; however, it has small stores across the Maritimes. The company also distributes some of its clothing lines to specialty stores with similar missions and values in Toronto. BE operates from rented premises. BE has one warehouse, in Halifax, from which all of its goods are shipped. 

BE has operated successfully for several years, but over the past nine months it has had a significant reduction in profit. This is causing concern for Kathleen and Christine.

In May 20X6, BE’s purchasing manager resigned, leaving the operations at the warehouse very disorganized. Remaining staff members have been unable to keep up with product sourcing and store distribution. Recruitment for a permanent replacement is underway; in the meantime, the company is using other staff members to perform the manager’s duties. To keep the disruption minimal, Christine and Kathleen authorized the store managers to make product purchases directly to the store, rather than through head office. Kathleen is concerned that the inventory on hand may be piling up, as there is little oversight.

BE has a December 31 year end. It is October 13, 20X6, and you are an audit manager with H&R assigned to work on the year-end audit for BE. Steve will be the lead audit partner for the audit engagement. Steve met with Kathleen in August 20X6 to discuss the year-end audit. (Notes from the meeting are in Appendix 1.) At this meeting, Kathleen also provided BE’s financial performance for the nine months ended September 30, 20X6, along with the prior year audited financial statements (Appendix 4).

Kathleen and Christine believe BE’s control environment is strong. They have been working to ramp up procurement and warehouse controls as suggested by their predecessor auditors. Kathleen has provided a description of the purchases system and the control activities that have been implemented in the purchasing and shipping department (Appendix 2).

On September 30, 20X6, one of the new staff accountants from H&R attended BE’s inventory count. This work is documented in Appendix 3.