PlayShare Company Audit Planning and Accounting Issues

Vocabulary practice flashcards covering accounting issues, ASPE standards, materiality calculations, and audit procedures for PlayShare Company.

No Late Fees (NLF) Program Revenue Recognition Issue

The improper recognition of $4,539\text{K}$ in revenues and $4,210\text{K}$ in accounts receivable when toys are not returned within 30 days, despite approximately $93\%$ of the balance remaining uncollected because customers frequently return the toy rather than pay.

HB 3400 Revenue Recognition Criteria

The ASPE standard requiring that revenue be recognized only when performance requirements are satisfied, the risks and rewards of ownership have transferred, reasonable assurance exists regarding measurement of consideration, and ultimate collection is reasonably assured.

NLF Program Recommended Accounting Treatment

The accounting adjustment requiring PlayShare to avoid recognizing $100\%$ of overdue toy fees upfront, opting instead for cash-basis recognition or recognition based on a $7\%$ historical collection rate, which reverses $93\%$ ($3,915\text{K}$) of outstanding revenues.

Lower of Cost and Net Realizable Value (HB 3031)

The ASPE valuation requirement mandating that inventory be measured at the lower of its historical cost or net realizable value (NRV).

Previously Rented Toys Inventory Write-Down

A required balance sheet reduction of $1,763\text{K}$ ($3,526\text{K} \times \frac{10}{20}$) to adjust the carrying value of previously rented toys from an average cost of $20$ down to their net realizable value of $10$.

HB 1000 Liability Criteria

The financial reporting framework defining a liability as an entity's unavoidable present obligation to transfer assets or provide services arising from past transactions or events, recognized when measurable and probable that economic benefits will be given up.

Toy Points Program Estimated Liability

An unrecorded obligation of $6,852,800$ calculated as $34,264,000$ outstanding points multiplied by $0.20$ per point (where 100 points redeem a $20$ toy), which PlayShare failed to record as a current liability and promotion expense.

Toys by Mail (TBM) Introductory Offer

A customer subscription charging $500$ upfront for 3 years (36 months) of toy rentals by mail, yielding $7,432\text{K}$ in revenue that PlayShare improperly recognized in full rather than deferring over the 36-month service term.

HB 3064.64 / HB 3063.09 Intangible Asset Impairment

Accounting standards requiring internally developed intangible assets and capitalized development costs to be tested for impairment whenever events or changes in circumstances indicate their carrying amount may not be recoverable.

Capitalized Website Development Costs Issue

The potential impairment and overstatement of PlayShare's $8,512\text{K}$ capitalized asset due to frequent website crashes and inadequate technical support from SWD.

PlayShare Inherent and Control Risk Drivers

Audit risk factors including the bank's reliance on financial statements to assess loan repayment, management bias to overstate profits, opening 10 new stores in 2026 without adequate controls, and system instability in Toys by Mail.

Income from Continuing Operations Before Taxes Base

The audit benchmark of $5,547\text{K}$ at November 30, 2026, selected to determine materiality because PlayShare is a profit-oriented entity and its bank is focused on profitability.

PlayShare Materiality Thresholds

The audit thresholds established at November 30, 2026, consisting of an overall materiality of $166\text{K}$ ($3\% \times 5,547\text{K}$) and a preliminary performance materiality of approximately $99\text{K}$ ($60\% \times 166\text{K}$).

Combined Audit Approach

An audit strategy employing both tests of controls and substantive procedures, selected due to PlayShare's computerized point-of-sale system, high volume of low-dollar transactions, and a tight reporting deadline in early January 2027.

No Late Fees Audit Assertions

The audit assertions of existence and valuation evaluated to verify whether the $4.2\text{M}$ accounts receivable balance is valid and collectible at December 31, 2026.

Customer Loyalty Liability Audit Assertions

The audit assertions of completeness and valuation evaluated to confirm that all outstanding obligations from the Toy Points program are fully recognized and reasonably measured.

Toys by Mail Audit Assertions

The audit assertions of occurrence and accuracy for recognized revenues, and existence, completeness, and valuation for deferred revenue liabilities.

Website Asset Audit Assertions

The audit assertions of existence and valuation tested by comparing future cash flow forecasts against carrying amount to determine whether an impairment loss must be recognized.