Question

TUV Hardware Stores is a major retailer of lumber and building products. They are privately owned but professionally managed. Recently, they took out a bank loan to build a new robotic warehouse. Debt to equity is now .2:1, and the bank has asked for financial statements. They have approached your audit firm to provide some assurance based on your excellent reputation.

Each retail store is franchised and there are no corporate-owned stores. In 2020, franchise fees are expected to be $176 million while wholesale sales to stores are expected to be $2,416 million and wholesale sales direct to major builders are expected to be $203 million. Gross profit on wholesale sales is around 5%. The franchise fee goes to such things as store support (training, point of sale inventory, pricing systems) and advertising, and a 20% profit.

TUV has operations across Canada with major warehouses in Vancouver, Winnipeg, Brampton, and St. John, New Brunswick. The new warehouse will be built in Kitchener. When it is complete, the warehouse in Brampton will be sold, likely for a large gain on sale since land prices in Brampton have soared in the last few years.

Required

Briefly discuss five elements to consider in planning the engagement for TUV.

Answer 1

Ans: Since audit work is related to assurance service hence auditor should focus on all the variables having effect on audit data ; such as

1. Debt Equity Ratio
2. Assumption for forecasting and other information
3. Risk Associated with business
4. Authenticity of value increase of in Land Price
5. Comparison with Industry Benchmark

Auditor has been appointed to provide assurance to bank regarding information provided for prospective loan. Since auditor is dealing with forecasted financial information, reasonableness of assumption shall be considered.

Due Deligence shall be conducted for the assigned work.