Case Study Of Green Grass Lawn Care

Wants to incorporate business to benefit from tax advantages of operating a business as a corporation (wants to know the advantages)

Leah holds 60% of shares of Green, children owns the rest

Wants to monitor business properly to make better day-to-day decisions

Green

February 2004 – Leah purchased assets & customer list of another lawn care services

Spring 2004 – Green provides full range of lawn & garden care services to residences

5 crews of workers serving 250 homeowners

Crew leader – has training in lawn care & gardening & is responsible for supervising assistant (3 hired from lawn care company Leah purchased + 2 new)

Each crew operates separately & has a pick-up truck & all necessary equipment

Lawn care season = 7 months long & customer must sign up for entire season

Offers # of different lawn & garden package (avg monthly revenue each customer = 300)

Services: regular services + one-time jobs w/ additional charges

Increasing demand ƒ  purchased new truck for 5th crew & additional equipment

Operating decisions made by Leah

Compensation

Leah not taking salary from Green but paying dividends to pay family member (each member in lower tax bracket)

Sons John take a few hours/ week to look after some of Greens’ accounting & pay bills (receives salary of 4,200/ month), remaining time look after sons (aged 3 and 13)

10 hourly employed employees in crew of 2 (paid @ end of each week)

Assistants paid min wage (high turnover), w/holds income tax, EI, CPP

Employees report hours worked to Green

Purchases

Large quantities of supplies to meet needs of customers

Purchase new lawn mower & large equip (periodically)

Leah does purchases to keep control of purchasing function

Each week Leah distributes supplies needed for the week to each crew (if crew runs short of supplies, Leah delivers more and sometimes crew make purchases if Leah can’t deliver quickly enough ƒ  submit receipt to Leah for reimbursement)

Leah’s purchases paid w/ personal credit card (each month go through statement to identify business related expense)

Saves receipt for business-related purchases (if she has it) and stores it separately from

Crew leaders keep trucks and are allowed to use trucks personally (they are responsible to fuel the trucks & bring them for maintenance)

Crew leaders supplied with gas company credit card for gas purchases

Leah made arrangement w/ 2 local garages to do repairs (invoice Green directly for work done)

Crew leader responsible for costs on trucks for personal use

Record keeping

Accounting information maintained on Leah’s 5 year old personal home computer

Used to maintain info using spreadsheet & manual records

Still records cash collected & expenses on spreadsheet & keeps a card for each customer (record services packages purchased and pmts received)

Lost track of some pmts received & paid invoices for expenses

Leah’s computer infected w/ virus & hard drive failed (unable to be recovered)

One employee approach her & offered custom designed system w/ an ongoing maintenance agreement @ cost of 10,000

Green’s office in Bessner’s basement w/ computer, files, other records

Monitoring field activities

Difficulty monitoring hours each crew work, how hard they work, quality of work done

Supplied cell phones to each crew so she can contact them on job

Plans to incorporate new company for snow removal business (take advantage of low rate small business corporations)

Business advices

Objective: Wants to monitor business properly to make better day-to-day decisions

Difficulty ensuring employees report actual hours worked (motivated to report more hours since paid hourly) ƒ  recommend switching to salaries instead of hourly wage

High turnover may not be good for Green because new employees are lower in productivity (need to adapt to role and environment) ƒ  sign contracts with employees

Should have a better channel for the crews to obtain supplies other than trying to deliver supplies when they are short or buy them if Leah cannot deliver quickly (inefficient)

Inefficiency and inaccuracy if use personal credit card to pay business-related purchases (may include/exclude personal purchases and time consuming) ƒ  set up business credit card and only purchase business-related purchases with business credit card and personal purchase with personal credit card

Many issues with record keeping:

Information maintained using spreadsheet and manual records (issues with data integrity – completeness and accuracy)

Record cash collected and expenses on spreadsheet (input errors less likely to be caught by spreadsheet, no access control)

Recommendation: purchase accounting software to keep track of revenue and expenses with input controls to ensure data integrity & access secuirty

Computer infected with virus ƒ  perform daily backups on separate drive, install anti-virus software and set up firewall

Come up with disaster recovery program since all files and documents of Green located in Bessner’s basement

Should not accept employee’s offer of custom designed system with ongoing maintenance agreement because unsure if testing done, system designed appropriately ƒ  should hire professional consultant

To ensure quality work ƒ  can perform customer satisfaction surveys

Performance reviews to determine how employees are performing relative to one another

Design incentive programs to encourage employees to work hard

Do not allow crew to use trucks for personal use because employees have gas company credit card in which gas for personal use are charged to Green

Tax advices

Objective: Wants to incorporate business to benefit from tax advantages of operating a business as a corporation (wants to know the advantages)

Cannot take advantage of low income brackets by owning only 60% and having children own remaining 40% because children are only aged 3 and 13 (income of minors would be attributed back to Leah and taxed at higher tax bracket)

Customer list acquired can be capitalized as eligible capital property

Capitalize equipments and trucks (can claim CCA on depreciable properties)

Dividends paid to minors are still attributed back to Leah

Deductibility of employees salaries since withheld income taxes, EI, CPP

Incorporating separate company for snow removal business will split income but small business deductions will still be shared among both businesses because they will be related (both owned by Leah)

Campbell’s Toy Store

Case facts [2] 

Role: Auditor of Campbell’s Toy Store (CTS) CA of Filmore & Gus

Client: Campbell’s Toy Store (CTS)

Local retail operation w/ year end of February 28

Gina Cooper – Controller of CTS

January 1992 – completed inventory count and internal control testing without any issues

March 2, 1992 – Controller explains virus incident before year end:

Lost control of microcomputer system temporarily

February 14, 1992 noon – someone introduced a computer virus into system that affected every program in network (no way of knowing what program did)

Unauthorized program can change data in computer, erase files, cause general damage

Doesn’t know how virus got into the system (could have been entered by employees playing a joke or someone breaking into computer through modem access, or could have come in through purchased programs we use)

Spend a lot of time & money to try to remove program and appear to have succeeded

Required:

Memo to audit partner discussing auditing implications of event

Recommend controls that could be instituted to prevent viruses from entering CTS’ computer system in the future

Audit implications

Cannot rely on previous internal control testing

Issues with data integrity

Completeness of data on computer system (difficulty in performing audit trail)

Accuracy of data (data may have been manipulated by virus)

Validity of data (data may be added or duplicated without authorization)

Request for back-ups done before virus invaded CTS’ computer system

Substantive approach but rely on evidences provided by third parties (vendors, suppliers, banks)

High risk client

Determine if CTS’ anti-virus software is implemented correctly

Adequacy of policies with regards to internet usage and code of conduct (internal control)

Possibility of fraud and disruption to disrupt files and evidence of fraud

Recommended controls to prevent viruses

Implementation of anti-virus and other security software (perform daily virus and spyware scans)

Ensure on-site and off-site backups of data done (ensure there is firewall)

Ensure security of access (passwords) and physical assets (computers)

Scan any devices that are attached to the computers

High security controls to ensure employees cannot browse personal websites that may contain virus

Implement internet policy to ensure proper use of CTS’ internet usage and code of conduct