Peach Blossom Company #8 - Case Study PDF

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Assignment #8 Completing the Audit Peach Blossom Cologne Company Attorney's Letter December 31, 2009

A.L./E-5 1 of 2 2-4-10 JWP

Edwards, Overstreet, and Gilley Attorneys at Law 1604 South Fourth . Chicago, Illinois 60614 Phone: 312-555-3892 Fax: 312-555-9998 January 20, 2010 Anderson, Olds and Watershed Certified Public Accountants 615 Big City National Bank Building Main at Michigan Avenue Chicago, Illinois 60612 Re: Peach Blossom Cologne Company Dear Sir or Madam: By letter dated January 4, 2010, Mr. Lawrence Lancaster of Peach Blossom Cologne Company (The "Company") has requested us to furnish you with certain information in connection with your examination of the accounts of the Company as of December 31, 2009. While this firm represents the Company on a regular basis, our engagement has been limited to specific matters as to which we were consulted by the Company. Subject to the foregoing and to the last paragraph of this letter we advise you that since January 1, 2009 we have not been engaged to give substantive attention to, or represent the Company in connection with material loss contingencies coming within the scope of clause (a) of Paragraph 5 of the Statement of Policy referred to in the last paragraph of this letter. We are responding to an action that has been initiated against Peach Blossom Cologne Companyalleging injury due to defective products. The action, Ersham v. Peach Blossom Cologne Company, is not in litigation. Investigation, preparation, including development of the factual data and legal research and progress of the matter have reached a stage whereby an assessment can be made, taking all relevant factors into account that may affect the outcome. Although the litigation is being defended vigorously and the Company has meritorious defenses, we are of the opinion that the plaintiff will likely prevail in this action, and it is extremely doubtful that the Company will prevail. As to the amount of potential loss, total costs and damages that might ultimately be assessed against the Company will be much less than the $100,000 damages claimed by the plaintiff. However, at this time the amount is not susceptible of reasonable estimation. (Continued)

A.L./E-5 2-4-10 JWP Note: Disclosure of this contingency is required in the financial statements. Reference Note 4, 12/31/09. JW

Attorney letter for contingent liability stated the following information; We are of the opinion that the plaintiff will likely prevail in this action, and it is extremely doubtful that the Company will prevail. As to the amount of potential loss, total costs and damages that will be assessed against the Company will be much less than the $100,000 damages claimed by the plaintiff. However, at this time the amount is not susceptible of reasonable estimation. This means that the Peach Blossom Cologne Company may have contingent liabilities, but the company will only need to disclose that it will have the liability because the amount of the liability is not susceptible of reasonable estimation.

Antonio Garzon Audit Senior

Peach Blossom Cologne Company Attorney's Letter December 31, 2009

A.L./E-5 2 of 2 2-4-10 JWP

Page Two

The information set forth herein is as of the date of this letter and we disclaim any undertaking to advise you of changes which thereafter may be brought to ourattention. This response is limited by, and in accordance with, the ABA Statement of Policy RegardingLawyers' Responses to Auditors' Requests for Information (December 1975); without limiting the generality ofthe foregoing, the limitation set forth in such Statement on the scope and use of this response (Paragraphs 2 and 7) are specifically incorporated herein by reference, and any description herein of any "loss contingencies" is qualified in its entirety by Paragraph 5 of the Statement and the accompanying Commentary (which is an integral part of the Statement). Consistent with the last sentence of Paragraph 6 of the ABA Statement of Policy and pursuant tothe Company's request, this will confirm as correct the Company's understanding as set forth in its audit inquiry letter to us that whenever, in the course of performing legal services for the Company with respect to a matter recognized to involve an unasserted possible claim or assessment that may call for financial statement disclosure, we have formed a professional conclusion that the Company must disclose or consider disclosure concerning such possible claim or assessment, we, as a matter of professional responsibility to the Company, will so advise the Company and will consult with the Company concerning the question of such disclosure and the applicable requirements of Statement of Financial Accounting Standards No. 5.

Very truly yours, EDWARDS, OVERSTREET AND GILLEY Michael Overstreet Michael Overstreet Partner

Peach Blossom Cologne Company Letter of Representations December 31, 2009

L.O.R./E-6 1 of 4 2-5-10 JWP

Peach Blosso Cologne Company 1308 Beehive Boulevard Chicago, Illinois 60615 Phone: 312-477-7288 Fax: 312-477-9999 Internet: www. peac hblos som . com February 5, 2010 Anderson, Olds and Watershed Certified Public Accountants 615 Big City National Bank Building Main at Michigan Chicago, Illinois 60612 The following representations are made to you in connection with your examination of the financial statements of Peach Blossom Cologne Company as of December 31, 2009 for the purpose of expressing an opinion as to whether the financial statements present fairly, in all material respects, the financial position, results of operations, and cash flows of Peach Blossom Cologne Company in conformity with generally accepted accounting principles. We confirm that we are responsible for the statement of financial position, results of operations, andcash flows in conformity with generally accepted accounting principles. Certain representations in this letter are described as being limited to matters that are material. Items are considered material, regardless of size, if they involve an omission or misstatement of accounting information that, in the light of surrounding circumstances, makes it probable that the judgment of a reasonable person relying on the information would be changed or influenced by the omission or misstatement. We further confirm that the following representations made to you during your audit examination are accurate to the best of our knowledge and belief: Financial Statements The financial statements referred to above are fairly presented in conformity with generallyaccepted accounting principles. All material transactions have been properly recorded in the accountingrecords underlying the financial statements. No fraud exists involving management or employees who have significant roles in internal control or others that could have a material effect on the financial statements. No shortages or irregularities have been discovered that have not been disclosed to you, and to our knowledge there is nothing reflecting upon the honesty of members of our organization. The company has no plans that could materially affect the carrying value or classification of assets orliabilities.

Peach Blossom Cologne Company Letter of Representations December 31, 2009

L.O.R./E-6 2 of 4 2-5-10 JWP

Page Two Receivables Trade Accounts receivable, net, in the amount of $ 227,674 are valid receivables and do not include any amounts for goods shipped on consignment or approval. In our opinion, the balance in Allowance for Bad Debts of $ 6 ,506 is sufficient to cover any losses, discounts, or allowances that may be incurred or allowed in the collection of the receivables. Inventories: The Company's inventory in the amount of $ 628,980 as determined by actual count by competent employees under the supervision of management as of December 31, 2009 are fairly stated on the first-in, first-out, lower-of-cost-or-market basis. Reasonable allowance has been made for slow-moving, obsolete, unsaleable, or unusable items. All inventories are the property of the Company. Inventory balances do not include (1) amounts of goods consigned to the Company, (2) merchandise billed to customers on or before the inventory date, or (3) any items for which the liability has not been provided on the books. Property, Plant, and Equipment: Property, plant and equipment is owned with satisfactory title. Capitalizable charges and purchased additions during the year are stated at cost. Property disposed of or abandoned was removed from the accounts. The provision for depreciation in the amount of $ 74,012 was determined on a basis consistent with preceding years. In our opinion, depreciation methods used and depreciable lives assigned are appropriate for allocating the cost of the assets over their useful lives. The valuation account, accumulated depreciation (balance of $383,798 ) , is reasonably adequate to state property, plant, and equipment assets at a reasonable book value with respect to the utilization expected over their remaining lives. Owned Assets: The Company had satisfactory title to all owned assets at December 31, 2009. All significant mortgages, assignments, pledges, or other encumbrances of assets have been disclosed to you. Liabilities: With the possible exception of a few minor amounts, all direct liabilities of the Company amount to $ 413 ,607 and were recorded on the books as of December 31, 2009. There are no: a. Violations or possible violations of laws or regulations whose effects should be considered for disclosure in the financial statements or as a basis for recording a loss contingency. b. Unasserted claims or assessments that our lawyer has advised us are probable of assertion and must be disclosed in accordance with FASB Statement No. 5, Accounting for Contingencies.

Peach Blossom Cologne Company Letter of Representations December 31, 2009

L.O.R./E-6 3 of 4 2-5-10 JWP

Page Three

c. Other liabilities or gain or loss contingencies that are required to be accrued or disclosed by FASB Statement No. 5. The Company had no other contingent or possible liabilities that have not been disclosed to you. Purchase and Sales Commitments: At December 31, 2009, the Company had no important unfilled contracts for purchases in excess of normal requirements or at prices substantially in excess of market, or for sales at prices that are expected to result in a loss. Capital Stock: All capital stock issued or reserved for options, warrants, or other future issuance is disclosed in the financial statements. Minutes: We have made available to you (1) all financial records and related data, and (2) minutes of the meetings of stockholders, directors, and committees of directors, or summaries of actions of recent meetings for which minutes have not yet been prepared. Minutes of such meetings as exhibited to you are complete and authentic records of all such meetings held during the period from January 1, 2009 through December 31, 2009. General: No events have occurred and no facts have been discovered since December 31, 2009, whichwould make the balance sheet at that date or the statement of earnings for the year then ended materially inaccurate or misleading. No charges are pending against the Company for alleged violations of federal, state, or local laws, which would have any material effect on the financial statements. No communications from regulatory agencies have been received concerning noncompliance with or deficiencies in financial reporting practices. The company has complied with all aspects of contractual agreements that would have a material effect on the financial statements in the event of noncompliance. No director, officer, or principal holder of the Company's equity securities was indebted (except for minor amounts for ordinary travel and expenses) to the Company at any time during the year. The following have been properly recorded or disclosed in the financial statements: a. Related-party transactions, including sales, purchases, loans, transfers, leasing arrangements,

Peach Blossom Cologne Company Letter of Representations December 31, 2009

L.O.R./E-6 4 of 4 2-5-09 JWP

Page Four and guarantees, and amounts receivable from or payable to related parties. b. Guarantees, whether written or oral, under which the company is contingently liable. c. Significant estimates and material concentrations known to management that are required to be disclosed in accordance with the AICPA’s Statement of Position 94-6 (Disclosure of Certain Significant Risks and Uncertainties). (Significant estimates are estimates at the balance sheet date that could change materially within the next year; concentrations refer to volumes of business, revenues, available sources of supply, or markets or geographic areas for which events could occur that would significantly disrupt normal finances within the next year.)

Internal Control: We confirm that we are responsible for establishing and maintaining adequate internal control over financial reporting. We have prepared a separate report on internal control over financial reportingin compliance with section 404 of the Sarbanes-Oxley Act of 2002. Regarding Attorney’s Letter: As discussed in Note 4 to the financial statements, the Company is a defendant in a lawsuit alleging product liability. The Company's counsel is of the opinion that the plaintiff will prevail in the action. As the amount is not subject to reasonable estimation, no provision for liability has been made in the accompanying financial statements. Very truly yours, Lawrence Lancaster President Peach Blosso m Co lo gne C ompa ny

Parker Shelton Controller Peach Blo ssom Co logne Comp any

Peach Blossom Cologne Company Contingent Liabilities and Subsequent Events December 31, 2009

E-7 2-5-10 JWP

Inquiry was made of Mr. Lancaster, President, Mr. Shelton, Controller, and Ms. Stockton, Treasurer, concerning possible contingent liabilities and events occurring subsequent to the balance sheet datethat may require accrual or disclosure in the financial statements. The only matter discovered is litigation described by the client’s legal counsel, Edwards, Overstreet,and Gilley, reported in their letter to us (Schedule (A.L./E-5)). The client is a defendant in a productliability suit. The attorneys are of the opinion that the client will not prevail in this action. However, the amount is not susceptible to reasonable estimation. According to counsel, it appears that the judgment against Peach Blossom will be much less than the $100,000 damages being sought by the plaintiff. Accordingly, I have proposed disclosure of this contingent loss and modified the auditor’s report accordingly. I also examined the minutes of the meetings of the Board of Directors and the client's contract files, inquired of management, and reviewed subsequent year’s journals and ledgers, searching for possible contingent liabilities and subsequent events. Nothing was found to indicate the existence of any contingent liabilities or subsequent events. On the basis of my examination, it is my opinion that no contingent liabilities exist at 12-31-09 and that no subsequent events have occurred requiring accrual or disclosure. Antonio Garzon Audit Senior February, 5, 2010

Peach Blossom Cologne Company Unrecorded Liability Search December 31, 2009

E -8 2-5-10 JWP

I reviewed all cash vouchers and supporting documents for the period 1-1-10 to 1-11-10, as well asunmatched invoice and receiver files for the period 1-1-10 to 1-22-10. No January vouchers represented merchandise or services prior to January 1, 2010, except as noted on W/P (E-2). A review of transactions within the interest and professional fees operating accounts, as well as a review ofthe minutes of the Board of Directors' meetings, indicated that there were no unrecorded note obligations or litigation contingencies found therein. Confirmation from client's legal counsel indicated that a contingent liability exists as a result of litigationin progress. The nature of this litigation and the required disclosures are explained in the contingentliabilities memorandum (W/P E-7) and referenced in attorney's letter (A.L./E-5). A letter of representations was obtained. Regarding liabilities, that letter indicated that all direct liabilities of the company were recorded and all contingent liabilities had been disclosed to our auditing firm. The letter revealed no apparent unrecorded liabilities. The letter of representations is referenced (L.O.R./E-6). Standard bank confirmations were obtained. No direct or contingent liabilities werenoted. . Excerpts from minutes of the Board of Directors' meetings are included in the permanent file materials. The minutes revealed no items resulting in unrecorded liabilities. Aside from liabilities discussed in this memorandum, no unrecorded liabilities werefound.

Antonio Garzon Audit Senior February 5, 2010

ANDERSON, OLDS, & WATERSHED Certified Public Accountants 615 Big City National Bank Building Main at Michigan Avenue Chicago, Illinois 60612 Phone: (312) 555-4452 Fax: (312) 555-9991 ww w. aow cpa. co m

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders The Peach Blossom Cologne Company Report on the Financial Statements We have audited the accompanying balance sheets of Peach Blossom Cologne Company, Inc. asof December 31, 2009 and 2008, and the related statements of income, changes in shareholders’ equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

Management’s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor’s Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. Anaudit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Peach Blossom Cologne Company as of December 31, 2009 and 2008, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States.

We have also audited, in accordance with the standards of the Public Company AccountingOversight Board (United States), the effectiveness of Peach Blossom Cologne Company’s internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control—

Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 10, 2010, expressed an unqualified opinion.

Anderson, Olds, and Watershed Certified Public Accountants Honolulu, HI August 7, 2017...