BAM7104 CASE STUDY TRI 1823

BEAU CHOCOLATE LTD

Mike owns 30% of the ordinary shares in Beau and a further 25% are owned by the company’s finance
director, Violet Dahl. The remaining shares are held by other investors not involved in the management
of Beau. Beau’s accounting year end is on September 30th.

Beau manufactures and sells luxury organic chocolates in the UK. Beau sells its chocolates online and
through its own store which opened on 31 March 2018. In addition, Beau has a three-year contract to
supply chocolates to a major retailer, Ascon Stores.

Beau’s website enables customers to order boxes of chocolates as well as join the company’s tasting
club. Tasting club members pay an annual subscription for which they receive a selection of chocolates
each month. All chocolates are delivered direct to customers’ homes via a courier.

The contract with Ascon provides Ascon with exclusivity which prohibits Beau from supplying chocolates
to any other retailer. The revenue generated from the contract accounts for approximately 20% of
Beau’s total revenue and Beau achieves a 25% gross profit margin on these sales. The contract is due
for renewal on 31 March 2019. Ascon has written to Beau statint that it believes the opening of Beau’s
store is in breach of the exclusivity agreement.

The purchase of the premises and fixtures for the new store was financed by a five-year loan from the
company’s bank which requires Beau to meet loan covenants set out in the loan agreement. Any breach
of the loan covenants would result in the loan becoming repayable immediately.

Beau manufctures all of its own chocolates at its UK production plant using high quality organic
ingredients. The plant includes refrigeration facilities for fresh ingredients and storerooms for other
ingredients. Beau keeps a perpetual inventory system for in ingredients and finished chocolates.
Inventory records are updated to reflect the delivery and use of ingredients, and the production and
dispatch of finished chocolates. A full inventory count will be carried out on 30 September 2018 during
which production and despatch of finished chocolate will continue.

Beau pruchases its main ingredient, cocoa, from its sole cocoa supplier located in Brazil. All purchases of
cocoa are invoiced and payable in Brazilian reals. Mike and Beau met the auditors on 10 September
2018 and told them

1) During August 2018 Beau received adverse publicity regarding its deliveries. Due to warm weather,
chocolates often arrived at customers’ homes in poor condition. A significant number of customers
canceled their subscription to the tasting club as a result.
2) Beau is being sued by a competitor that claims one of Beau’s new chocolate ranges, ‘Purechoc’ , has
infringed the trademark owned by the competitor for the brand name. The outcome of the claim
will not be known until after the auditor’s report is signed.
3) Mixed weather patterns in Brazil have meant that cocoa has been in short supply at certain times
during the year and beau has resorted to using non-organic coa in order to continue production.
BAM7104 CASE STUDY TRI 1823

Mike and Violet consider these instances to be limited and plan to continue to state in the directors’
report thae Beau uses only organic ingredients in its chocolate.
4) On 1 September 2018 the directors prepared a profit forecast for the full year ending 30 September
2018 and they provided you with the following summary. Violet explained the difference between
the forecast and budgeted performance as being due to higher than expected interest costs on the
bank loan and unbudgeted administration costs associated with operating the new store.

Latest forecast year Original budget year Actual year ended 30

ending 30 September ending 30 September September 2018
2018 2018
‘000 ‘000 ‘000
Revenue 9,600 11,700 10,800
Profit before tax 345 702 1,200

Question 1:

The audit firm is questioning whether Beau’s business may fail the ‘going concern’ assumption. Discuss
what evidence that the company can provide to assure the auditors the Beau’s business is viable.

Question 2:

Beau has three different revenue streams 1) sales to Ascon 2) sales via the store and 3) sales through
online. The auditors are concerned with how Beau recognizes revenue. Discuss the timing of the
revenue recognition for each of the revenue streams and suggest how the company can confirm that
the revenue recognized are valid.

Question 3:

There are several issue that raises the concern that Beau has not recognized liabilities and did not
disclose contingent liabilities. Discuss what are the events or information from the case that points out
to potential underreporting of the liabilities.

For each of the question above, consider also any ethical issues that may arise.