Question

Triple J Movers Ltd. is owned by Jacques Tétreault. The company used to be profitable but several new small companies have started to compete with Triple J, offering very low prices that Triple J cannot match. Jacques thinks he can make his company profitable again if he eliminates his competitors, which will allow him to raise prices.

He therefore decided to purchase one of his competitors each year for the next four years. The first company he bought was a proprietorship called Jerry's Trucking. Jacques has hired your audit firm to review the accounting system and controls at Jerry's Trucking to see what changes are needed before he can integrate it into Triple J Movers. Jacques hopes there are not many problems.

You interviewed the owner of Jerry's Trucking and the company's bank manager and learned the following information:

The company has customers in both Canada and in the United States, and the owner was not very knowledgeable about customs fees that must be paid and regulations that have to be followed when transporting goods across the borders. Also, the owner, Jerry, often simply took any cash that the business earned and spent it on personal items, instead of taking a salary from the business. There is only one office staff members besides Jerry: Jerry's cousin, who does all of the bookkeeping. His cousin is not an accountant but has taken some accounting courses. Jerry explained that controls at Jerry's Trucking are strong because:

• He can trust his cousin completely. (Having honest employees is important for effective control.)
• Jerry personally checks all of the bookkeeping entries, making any corrections he feels are necessary.
• At the year end, Jerry takes the bookkeeping records to a tax preparer who prepares his tax return.

2. Inherent Risks Relating to Jerry’s Trucking

Answer 1

- Integrity of management is doubtful: Cash is withdrawn by Jerry and it does not appear to be stalked or stated as salary. How dependable is the accounting?

- Company has not been audited formerly. (e.g. no preceding auditors to evaluate controls, help client with “blunders”)

- The accounting (cousin/Jerry’s Trucking) is not done by skilled accountants (this does not count as a strong control like Jerry thinks!). Dependable accounting? Following ASPE?

- Management not well-informed concerning tariffs, so errors recording these items could occur? Could they owe these amounts later if they don’t know to pay them now?

- Transactions in 2 countries: Is FX translation correct? Could have errors in a bunch of accounts.