Reference no: EM133016248

Question -

Q1. You, CPA, recently started working with Kelly and Partners, Chartered Professional Accountants, as a senior accountant. It is March 4, 2020, and you and your team have been working on an audit engagement for a long-time client, Jim Thortons (Jim's), a national coffee chain.

Jim's uses a promotion every spring whereby customers can win prizes by looking inside their empty coffee cup. The prizes range from a doughnut to a mid-sized automobile. Until recently, the promotion took place in the last quarter of Jim's fiscal year and there was no need to set up a liability at year end because the claim date coincided with the year-end date. As a result, all claims were processed prior to the statements being prepared.

The promotion has been so successful that Jim's has decided to expand it for an extra two months. The controller grumbled, "Clearly no one considered the accounting department in this decision, as now we need to set up a liability for claims to be settled in the next year."

Required - Identify an account level risk to be audited and develop a procedure to address that risk.

Q2. Jim's ordered a significant amount of coffee beans from a new supplier partway through the year. The beans were offered at a discount and the price was too good to pass up. Upon arrival, the manager realized that the beans did not meet Jim's quality standards and could not be used in the store. Jim's has been trying to return the beans but has now accepted that this is not possible. The coffee beans will not be brewed on-site but instead will be sold to a discount coffee retailer.

Required - Identify the account level risk to be audited and develop a procedure to address that risk.