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 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:
- Supply chain disruptions affecting the timely delivery of specialized materials
- Increased competition in the luxury yacht market
- 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:
- Seeking additional financing for its Caribbean expansion
- Facing increased scrutiny from environmental regulators
- Dealing with a recent change in the CFO position Specific Areas of Concern for Liabilities Testing:
- Completeness and accuracy of accounts payable, given the previous control deficiencies
- Proper classification and disclosure of long-term debt covenants
- Accurate recording of lease liabilities, especially with the new Miami office
- Potential unrecorded liabilities related to environmental compliance
- 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:
- 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
- Legal Exposure: Consider the potential legal risks auditors face when testing liabilities, especially if material misstatements are not
- Risk Assessment: Consider the risks of material misstatement in the acquisition and expenditure cycle, focusing on
- Materiality Calculation: Using the provided trial balance, calculate the overall materiality level for the audit. Explain your reasoning and
- Liabilities Lead Schedule: Create a liabilities lead schedule based on the trial balance information.
- 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
- Conclusion and Communication: Draft an email to the audit manager, Ben Goldman, summarizing your conclusion on liabilities testing. Include:
- Key findings
- Any identified misstatements or areas of concern
- Recommendation for further action (if necessary)
- Impact on the overall audit opinion
Additional Considerations:
- Focus on external liabilities in your analysis and testing
- Consider the specific risks that might be present in the Fort Myers area or for a company of this size and
- Address how the composition of the Board of Directors might influence your audit approach or risk
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.
Attached Files
Trial Balance -Workpaper Template.xlsx
Gabriela Aguiar LLC Board of Directors Meeting Minutes
June 15, 2024 (M-id-Year Meeting)
Present: Gabriela Aguiar (CEO), Kevin Arce, Elie Bassil, John Blasi, Connor Cizek, Stephanie
Clemente, Colby Collins, Chestina Conduah
1. Call to Order The meeting was called to order at 10:00 AM by Gabriela Aguiar, CEO.
2. Approval of Previous Minutes The minutes of the previous meeting were approved
unanimously.
3. Financial Update a. CFO presented Q2 financial results, noting a 15% increase in revenue
compared to the same period last year. b. Discussion of the ongoing impact of last year’s
hurricane on operations and sales.
o Sales in the affected region are down by 20% but showing signs of recovery.
o The insurance claim process is ongoing, with the potential for litigation discussed.
4. Legal Update a. General Counsel provided an update on the insurance claim dispute.
o The insurance company has denied full coverage, citing policy limitations.
o The Board authorized the pursuit of legal action if necessary. b. Discussion of
potential legal fees:
o Estimated $2-3 million in legal fees if litigation proceeds.
o The Board approved a budget of up to $3.5 million for legal expenses related to
this matter.
5. Expansion Plans a. Proposal to expand production capacity in response to increasing
demand. b. The Board approved exploring options for additional manufacturing space.
6. Other Business: None.
7. Adjournment The meeting was adjourned at 12:30 PM.
Gabriela Aguiar LLC Board of Directors Meeting Minutes
December 20, 2024 (Year-End Meeting)
Present: Gabriela Aguiar (CEO), Kevin Arce, Elie Bassil, John Blasi, Connor Cizek, Stephanie
Clemente, Colby Collins, Chestina Conduah
1. Call to Order The meeting was called to order at 9:30 AM by Gabriela Aguiar, CEO.
2. Approval of Previous Minutes The minutes of the previous meeting were approved
unanimously.
3. Financial Review a. CFO presented preliminary year-end financial results.
o Annual revenue is projected to be up 10% despite the hurricane’s impact.
o Profit margins are slightly down due to increased costs and legal expenses.
o Discussion of 2025 budget and financial projections.
4. Hurricane Impact and Insurance Litigation Update a. General Counsel provided an update
on the insurance litigation.
o A case was filed against the insurance company for breach of contract.
o Legal fees to date: $2.8 million, expected to increase in 2025. b. The Board
discussed the impact on cash flow and authorized a new line of credit.
o The Approved new line of credit for $44 million, effective January 7, 2025.
5. Debt Restructuring a. CFO presented a plan to consolidate existing debt.
o Proposal to take out a new loan of $15 million and roll the existing $12 million
line of credit into it.
o The Board approved the plan to be effective January 2, 2025.
6. Executive Compensation and Bonuses: Compensation Committee presented
recommendations for executive bonuses. The Board approved the following bonuses for
themselves:
o CEO (Gabriela Aguiar): $500,000
o Other Board Members: $150,000 each
o Discussion on linking future bonuses more closely to company performance and
resolution of the insurance litigation.
7. 2025 Strategic Planning
o a. Discussion of expansion plans and potential new product lines.
o b. The Board approved the budget for R&D in eco-friendly yacht technologies.
8. Other Business a. Brief discussion on potential capital leases for new equipment.
o The decision was made to continue with the current policy of not using capital
leases.
9. Adjournment The meeting was adjourned at 1:00 PM.
,
A1- Trial Balance-Audited
| Gabriela Aguiar LLC | DACPA | |||||
| Audited Trial Balance as of December 31, 2024 | A-1 | |||||
| (All figures in thousands of USD) | ||||||
| Account ID | Account Description | Debit (USD 000s) | Credit (USD 000s) | Single Column format | ||
| 10500 | Cash on Hand | 375 | – 0 | 375 | ||
| 10600 | Regular Checking Account | 21,000 | – 0 | 21,000 | ||
| 10700 | Payroll Checking Account | 1,125 | – 0 | 1,125 | ||
| 10800 | Savings Account | 750 | – 0 | 750 | ||
| 10900 | Accounts Receivable | 21,000 | – 0 | 21,000 | ||
| 11000 | Allowance for Doubtful Accounts | – 0 | 1,050 | (1,050) | ||
| 11100 | Inventory – Spotlight | 33,750 | – 0 | 33,750 | ||
| 11200 | Reserve for Inventory Obsolescence | – 0 | 1,500 | (1,500) | ||
| 11300 | Prepaid Insurance | 900 | – 0 | 900 | ||
| 11400 | Prepaid Rent | 600 | – 0 | 600 | ||
| 11500 | Office Supplies | 375 | – 0 | 375 | ||
| 11600 | Notes Receivable-Current | 1,500 | – 0 | 1,500 | ||
| 11700 | Other Current Assets | 375 | – 0 | 375 | ||
| 15000 | Land | 15,000 | – 0 | 15,000 | ||
| 15200 | Buildings and Land Improvements | 60,000 | – 0 | 60,000 | ||
| 15400 | Machinery, Equipment, Office Furniture | 60,000 | – 0 | 60,000 | ||
| 15600 | Accumulated Depreciation | – 0 | 33,750 | (33,750) | ||
| 15800 | Investments | 7,500 | – 0 | 7,500 | ||
| 16000 | Other Noncurrent Assets | 33,075 | – 0 | 33,075 | ||
| 20000 | Deferred Tax Assets (Liabilities) | – 0 | 6,000 | (6,000) | ||
| 20200 | Accounts Payable | – 0 | 19,200 | (19,200) | ||
| 20400 | Sales Tax Payable | – 0 | 600 | (600) | ||
| 20600 | Income Tax Payable | – 0 | 900 | (900) | ||
| 20800 | Wages Payable | – 0 | 1,125 | (1,125) | ||
| 21000 | FICA Employee Withholding | – 0 | 188 | (188) | ||
| 21200 | Medicare Withholding | – 0 | 45 | (45) | ||
| 21400 | Federal Payroll Taxes Payable | – 0 | 225 | (225) | ||
| 21600 | FUTA Tax Payable | – 0 | 15 | (15) | ||
| 21800 | State Payroll Taxes Payable | – 0 | 75 | (75) | ||
| 22000 | SUTA Tax Payable | – 0 | 23 | (23) | ||
| 22200 | FICA Employer Withholding | – 0 | 188 | (188) | ||
| 22400 | Medicare Employer Withholding | – 0 | 45 | (45) | ||
| 22600 | Dividend Payable | – 0 | 375 | (375) | ||
| 22800 | Interest Payable | – 0 | 473 | (473) | ||
| 23000 | Line of Credit | – 0 | 12,000 | (12,000) | ||
| 23200 | Current Portion Long-Term Debt | – 0 | 3,750 | (3,750) | ||
| 23400 | Other Current Liabilities | – 0 | 750 | (750) | ||
| 25000 | Notes Payable-Noncurrent | – 0 | 84,000 | (84,000) | ||
| 26000 | Common Stock | – 0 | 37,500 | (37,500) | ||
| 27000 | Paid-in Capital | – 0 | 7,500 | (7,500) | ||
| 28000 | Retained Earnings | – 0 | 28,500 | (28,500) | ||
| 40000 | Sales | – 0 | 187,500 | (187,500) | ||
| 40500 | Sales Returns | 1,500 | – 0 | 1,500 | ||
| 41000 | Warranty Expense | 1,125 | – 0 | 1,125 | ||
| 41500 | Income from Investments | – 0 | 600 | (600) | ||
| 42000 | Interest Income | – 0 | 150 | (150) | ||
| 45000 | Cost of Goods Sold | 112,500 | – 0 | 112,500 | ||
| 50000 | Freight | 2,250 | – 0 | 2,250 | ||
| 50500 | Advertising Expense | 3,750 | – 0 | 3,750 | ||
| 51000 | Auto Expenses | 375 | – 0 | 375 | ||
| 51500 | Research and Development | 6,000 | – 0 | 6,000 | ||
| 52000 | Depreciation Expense | 5,250 | – 0 | 5,250 | ||
| 52500 | Warehouse Salaries | 4,500 | – 0 | 4,500 | ||
| 53000 | Property Tax Expense | 900 | – 0 | 900 | ||
| 53500 | Legal and Professional Expense | 4,575 | – 0 | 4,575 | ||
| 54000 | Bad Debt Expense | 750 | – 0 | 750 | ||
| 54500 | Insurance Expense | 1,500 | – 0 | 1,500 | ||
| 55000 | Maintenance Expense | 1,125 | – 0 | 1,125 | ||
| 55500 | Utilities | 1,350 | – 0 | 1,350 | ||
| 56000 | Phone | 300 | – 0 | 300 | ||
| 56500 | Postal | 75 | – 0 | 75 | ||
| 57000 | Miscellaneous Office Expense | 375 | – 0 | 375 | ||
| 60000 | Payroll Tax Expense | 1,500 | – 0 | 1,500 | ||
| 60500 | Pension/Profit-Sharing Plan Expense | 1,125 | – 0 | 1,125 | ||
| 61000 | Rent or Lease Expense | 2,250 | – 0 | 2,250 | ||
| 61500 | Administrative Wages Expense | 9,000 | – 0 | 9,000 | ||
| 62000 | Interest Expense | 3,750 | – 0 | 3,750 | ||
| 70000 | Income Tax Expense – Federal | 3,750 | – 0 | 3,750 | ||
| 70500 | Income Tax Expense – State | 750 | – 0 | 750 | ||
| 80000 | Loss on Legal Settlement | 375 | – 0 | 375 | ||
| Totals | 428,025 | 428,025 | – 0 | |||
A-2 PBC 2025 Trial Balance
| Gabriela Aguiar LLC | DACPA | ||||||
| Trial Balance as of December 31, 2025 | A-2 | ||||||
| (All figures in thousands of USD) | |||||||
| Account ID | Account Description | Debit (USD 000s) | Credit (USD 000s) | Single Column format | |||
| 10500 | Cash on Hand | 500 | 500 | ||||
| 10600 | Regular Checking Account | 12,000 | 12,000 | ||||
| 10700 | Payroll Checking Account | 1,500 | 1,500 | ||||
| 10800 | Savings Account | 1,000 | 1,000 | ||||
| 10900 | Accounts Receivable | 16,000 | 16,000 | ||||
| 11000 | Allowance for Doubtful Accounts | 1,400 | (1,400) | ||||
| 11100 | Inventory – Spotlight | 45,000 | 45,000 | ||||
| 11200 | Reserve for Inventory Obsolescence | 2,000 | (2,000) | ||||
| 11300 | Prepaid Insurance | 1,200 | 1,200 | ||||
| 11400 | Prepaid Rent | 800 | 800 | ||||
| 11500 | Office Supplies | 500 |
