Case 3: Materiality and Liabilities Testing - Gabriela Aguiar LLC Audit Case (Due in 24h)

Title: Materiality and Liabilities Testing - Gabriela Aguiar LLC Audit Case

In this mini-case, you will audit and evaluate documents, such as debt confirmations, vendor

invoices, etc., in the audit of all of Gabriela Aguiar LLC's liability accounts. To expedite the

audit process, your audit teammate has already picked up the PBC schedules and scanned and

labeled them in the binder for you.

Case Background

FGCU-Accounting CPA firm has been engaged to audit Gabriela Aguiar LLC, a company based

in the Fort Myers area. The audit team is led by partner Isabella Dewitt, with Ben Goldman as

the audit manager. You are a senior auditor assigned to the liabilities testing portion of the audit.

Company Information:

Gabriela Aguiar LLC

CEO: Gabriela Aguiar

Board of Directors: Kevin Arce, Elie Bassil, John Blasi, Connor Cizek, Stephanie Clemente,

Colby Collins, Chestina Conduah

Company Background

Gabriela Aguiar LLC is a publicly traded company based in Fort Myers, Florida, specializing in

luxury yacht manufacturing and leasing. Founded in 2010 by Gabriela Aguiar, the Company has

grown rapidly to become a significant player in the high-end marine industry.

Key Business Details:

 Primary Business: Manufacturing and leasing luxury yachts

 Secondary Revenue Streams: Yacht maintenance services and marine equipment sales

 Market Position: Mid-sized Company with a strong presence in the southeastern U.S

 Recent Development: Expanding operations to the Caribbean market

 Public Trading: Listed on NASDAQ under the ticker symbol GAYL

Company History and Current Situation

Gabriela Aguiar, a former naval architect, founded the Company with a vision to create

customizable, eco-friendly luxury yachts. The Company's innovative designs and commitment to

sustainability quickly gained attention in the industry. In 2018, Gabriela Aguiar LLC went public

to fund its expansion plans. The Company has since opened a new manufacturing facility in Fort

Myers and established a leasing office in Miami.

Recent challenges include:

1. Supply chain disruptions affecting the timely delivery of specialized materials

2. Increased competition in the luxury yacht market

3. Regulatory changes related to environmental standards in yacht manufacturing

Financial Snapshot:

 Annual Revenue: Approximately $150 million

 Total Assets: Around $300 million

 Significant Liabilities: Long-term debt for manufacturing facilities, accounts payable to

suppliers, lease liabilities for Miami office

Office Meeting with Your Audit Manager

Ben Goldman: Good morning, team. I hope you're all doing well. How's the progress on last

month's assignment?

Team Leader: Good morning, Ben. We've just concluded the assignment, and we're working on

submitting the initial report for your review by the end of the working day today.

Ben Goldman: Excellent; I'll be looking forward to receiving that report. Now, let's discuss your

next assignment: the Gabriela Aguiar LLC Audit, specifically the liabilities testing. Given the

company's recent expansion and the importance of this audit, we need to pay extra attention to

this area.

Team Leader: Understood. What specific areas should we focus on?

Ben Goldman: I'm glad you asked. I've done a quick scan of the trial balance, and I have some

concerns about accounts payable. I need you to investigate a couple of things there.

Team Leader: What should we be looking for in accounts payable?

Ben Goldman: First, look for any AP that should have been written off according to the

company's accrual policy. Second, search for unrecorded accounts payable. I have a hunch there

might be some liabilities that haven't been reflected in the company's books yet.

Team Leader: Got it. We'll thoroughly review the AP. Anything else we should be aware of?

Ben Goldman: Yes, there's an issue with legal fees. I just heard from Gabriela Aguiar, LLC's

attorney. They're preparing the legal confirmation for us, but they mentioned $2.8 million in

legal fees related to hurricane damage litigation that haven't been billed yet for 2025 work.

Team Leader: That's a significant amount. How should we approach this?

Ben Goldman: We need an interim report on this to ensure we're comfortable that liabilities are

complete based on your search for unrecorded liabilities.

Team Leader: Understood. We'll look into that and include it in our report. Any other areas of

concern?

Ben Goldman: Yes, there are some developments with notes payable and their line of credit. I

spoke with the controller about the new debt. They took out a new loan of $15 million and rolled

the $12 million from the line of credit into it, effective January 2, 2025. There's something about

this in the Board of Directors' minutes, so make sure to review those.

Team Leader: We'll definitely review the minutes and follow up on that new debt arrangement.

Ben Goldman: Also, they started a new line of credit for $44 million on January 7, 2025.

Team Leader: That's a substantial new line of credit. We'll look into the details as well.

Ben Goldman: Good. Now, regarding leases, the controller assured me they don't have any

capital leases. I've looked over the assets, and I'm inclined to agree. You don't need to spend too

much time looking for these, but keep an eye out, just in case.

Team Leader: Noted. We'll do a quick check on leases but focus more on the other areas you've

mentioned.

Ben Goldman: That's right. Oh, and one more thing: payroll-related liabilities are being tested

with payroll, so you don't need to worry about them while you are testing.

Team Leader: Understood. Is there anything specific you'd like to see in our deliverables?

Ben Goldman: Yes, I'd like you to prepare a comprehensive audit plan for liabilities, including

your materiality calculations and planned procedures. I also want to see a liabilities lead

schedule, an AP aging schedule, and your initial findings on the potential issues I've mentioned.

Team Leader: We'll make sure to include all of those in our work.

Ben Goldman: Great. Once you've completed your testing, draft an interim report summarizing

your findings, mainly focusing on any material issues or discrepancies you uncover.

Team Leader: Will do. We'll keep you updated on our progress and let you know if we

encounter any significant issues.

Ben Goldman: Perfect. Do you have any questions or need any additional information to

proceed?

Team Leader: I think we have a clear direction for now. We'll reach out if we need any

clarification as we dig into the work.

Ben Goldman: Sounds good. I'm looking forward to seeing your results. Good luck with the

audit, team.

Current Audit Context

This is the third year the FGCU-Accounting CPA firm has been engaged to audit Gabriela

Aguiar LLC. The previous two audits resulted in unqualified opinions, but some control

deficiencies in the accounts payable system were noted.

The current audit is particularly crucial as the Company is:

1. Seeking additional financing for its Caribbean expansion

2. Facing increased scrutiny from environmental regulators

3. Dealing with a recent change in the CFO position

Specific Areas of Concern for Liabilities Testing:

1. Completeness and accuracy of accounts payable, given the previous control deficiencies

2. Proper classification and disclosure of long-term debt covenants

3. Accurate recording of lease liabilities, especially with the new Miami office

4. Potential unrecorded liabilities related to environmental compliance

5. The appropriate cut-off for liabilities pertaining to yacht manufacturing in progress Instructions:

Read all memos from your manager and the client, then read the steps in the audit program for

liabilities found on Work Paper F-0 (Excel Sheet labeled F-0 Liabilities Program) and

familiarize yourself with work papers. Complete all the steps on the audit program. Be sure to

document your work using the designated tick marks. The tick mark legend is located at the

bottom of each work paper. When you are finished with each workpaper, enter your initials in

the box in the top right.

Case Tasks:

1. Ethical Considerations: Consider the ethical implications of setting materiality levels

and how it affects the audit process. Consider the AICPA Code of Professional Conduct

and its relevance to this case.

2. Legal Exposure: Consider the potential legal risks auditors face when testing

liabilities, especially if material misstatements are not detected.

3. Risk Assessment: Consider the risks of material misstatement in the

acquisition and expenditure cycle, focusing on liabilities.

4. Materiality Calculation: Using the provided trial balance, calculate the overall materiality

level for the audit. Explain your reasoning and methodology.

5. Liabilities Lead Schedule: Create a liabilities lead schedule based on the trial balance

information.

6. Audit Procedures: Perform all audit procedures in the audit program (F-0) for

testing liabilities. Evaluate the findings of these tests and propose adjusting entries

as appropriate.

7. Conclusion and Communication: Draft an email to the audit manager, Ben Goldman,

summarizing your conclusion on liabilities testing. Include:

1. Key findings 2. Any identified misstatements or areas of concern 3. Recommendation for further action (if necessary) 4. Impact on the overall audit opinion

Additional Considerations:

 Focus on external liabilities in your analysis and testing procedures.

 Consider the specific risks that might be present in the Fort Myers area or for a company

of this size and type.

 Address how the composition of the Board of Directors might influence your audit

approach or risk assessment.

F-2 Debt Confirmations

Confirmation documents were received from Confirmation.com, a bank confirmation

clearinghouse. Received on 01/22; additionally received confirmations for cash, documented in

the audit for cash.