Healthy Meals 4 Kids: A Four-Part Instructional Case*
Accepted by Leslie Berger.
Abstract
enThis fictional case centers on a not-for-profit organization, Healthy Meals 4 Kids, in the province of New Brunswick, Canada, that provides free meals to families experiencing financial difficulty who have children with special dietary needs. The case provides an opportunity for students to perform many tasks related to external auditing—using a nonprofit accounting framework—from the point of client acceptance through to the conclusion of the audit. The case, teaching notes, and rubrics are intended to mirror the tone and feel of Chartered Professional Accountants of Canada (CPA Canada) cases used in the CPA Professional Education Program (CPA PEP) but at a difficulty level appropriate for undergraduate learners. The case is particularly reflective of case material that would be found in the assurance elective of the CPA PEP. The case is best deployed in an undergraduate or graduate course focusing on auditing or an accounting class for which not-for-profit accounting is a prerequisite or corequisite.
Résumé
frHEALTHY MEALS 4 KIDS : ÉTUDE DE CAS PÉDAGOGIQUE EN QUATRE PARTIES
Cette étude de cas fictive porte sur un organisme sans but lucratif de la province du Nouveau-Brunswick, Healthy Meals 4 Kids (Repas santé pour les enfants), qui fournit gratuitement des repas aux familles aux prises avec des difficultés financières qui ont des enfants qui présentent des besoins alimentaires spéciaux. L'étude de cas fournit aux étudiants l'occasion d'effectuer plusieurs tâches associées à un audit externe — à l'aide d'un cadre comptable adapté aux organismes sans but lucratif — à partir de l'acceptation du client jusqu'à la conclusion de l'audit. L'étude de cas, les notes pédagogiques et les grilles d'évaluation sont conçues de façon à reproduire le ton et l'approche des études de cas qu'utilise le Programme de formation professionnelle (PFP) de Comptables professionnels agréés du Canada (CPA Canada), mais à un niveau de difficulté approprié pour des apprenants de premier cycle. L'étude de cas est particulièrement similaire à celles qu'on retrouve dans le module optionnel sur la certification du PFP de CPA Canada. Elle convient bien à un cours de premier cycle ou de cycle supérieur sur les audits ou à un cours de comptabilité pour lequel le cours sur la comptabilité adaptée aux organismes sans but lucratif est un préalable ou un cours associé.
HEALTHY MEALS 4 KIDS: PART 1
You, CPA, are a senior accountant at SwiftLightfoot LLP, a midsize national accounting firm in Canada. You are a member of the Fredericton office. On February 23, 2023, you were approached by a partner at your firm to tell you that the firm was invited to discuss serving as the external auditor for a local not-for-profit organization (NPO). The NPO in question, Healthy Meals 4 Kids (HM4K), is an organization whose operations span the Atlantic provinces. It prepares and delivers meals for families in need who have children with special dietary requirements. The organization lays out its purpose on its website with this statement: “HM4K recognizes the high financial cost that varied dietary needs can have on Atlantic Canadian families. To reduce the burden on families in need, HM4K prepares and delivers meals that meet many different dietary requirements.”
This client is going to be very important for us. It is a major organization in the Atlantic provinces and a prestigious client to have. We can almost certainly get more business opportunities with other NPOs if they know we are the auditor for HM4K. This would be our first client that uses Accounting Standards for Not-for-Profit Organizations, so it's important that we do well in the first year. We will host an exploratory meeting with the client next week where we will start to build an understanding of their organization, hash out the potential terms of an eventual contract, and discuss the scope of the audit. They've given us a request for proposal (RFP) document to read in advance. Please ensure you're up to date with the major terms in the RFP document (Exhibit 1-1).
EXHIBIT 1-1. Extracts from the HM4K RFP document
Term
The successful proponent will be appointed for a single year with a possibility to be renewed annually for a maximum of 5 years of service. Reappointment will depend upon auditor performance and quality in the first year, as determined by the HM4K Audit Committee.
Confidentiality and Privacy
HM4K takes the confidentiality of its property very seriously. We expect that the successful proponent will promptly return all documents or working papers that are the property of HM4K. We also expect that the successful proponent will, after the audit, return, remove, or destroy any documents that belong to HM4K that they have copied or generated, whether physical or digital. This would include the destruction of copies of our leasing agreements, major donor pledges, tax returns, and notices of assessment, and so on.
Fees
The organization is strongly interested in stability in fees and obtaining the best value for money. The financial part of proponents' proposals will be worth 30% of the overall evaluation. If total donations to the organization for the year exceed last year's donations by at least 20%, the auditor will receive an additional 10% in fees.
Representation and Association
HM4K prides itself on having close relationships with its vendors. We work with our vendors as partners and endeavor to include them in all our operations. Your organization's values are very important to us. We expect that all our major vendors will participate in our annual fundraising drive and golf tournament. Vendors must spend the day with HM4K leaders and major donors, and each vendor must make a written statement to major donors showing support for the organization and encouraging them to donate to the cause.
Team-Building and Social Environment
HM4K has built a highly successful organization through teamwork and cooperation. We regularly host events for our staff and our major vendors to get to know each other better! We expect that the successful proponent for this RFP will attend two to three social events per month in the 6 months leading up to the audit to maximize teamwork-based synergies.
You review the HM4K RFP document in Exhibit 1-1.
It is now March 2, and you attend the planning meeting with the audit partner and client contact, Mary. She is the executive director of HM4K and helps with the accounting for the organization from time to time. You record the following excerpts of the conversation in your notebook:
Partner: Thank you for inviting us to propose to be your auditor, Mary; we are very excited by the potential to work with you.
Mary: Of course! We were very pleased to invite SwiftLightfoot to propose; we have heard excellent things about your firm. Our last firm was our auditor for three years but always seemed very absent and wasn't very good at answering our questions. As a result we have decided to switch auditors. We informed our present auditor of this decision back in October, and they assure us they will be available to answer questions from the new auditor. We hear you are very attentive to your clients' needs. One of our bookkeepers, Chris, works for your firm part-time and has been very vocal about the quality of your firm!
Partner: That's excellent; Chris is an important member of our team and, due to their familiarity with your organization, will be part of our audit team for HM4K. We wanted to go over some major scope items for the audit. Do you have any questions about our process?
Mary: Yes, we have been very low on human resources lately. We've had some unanticipated turnover, and some staff have had to take on additional responsibilities temporarily. As a result, I'm hoping you might be able to make the audit more efficient. We have always had a clean audit opinion, so I don't know if I see the need for some of the procedures that end up with the same result every year.
Partner: Of course, we can scale back our procedures in these low-risk areas—we will do less testing and ask for fewer documents from your staff.
Mary: Great! [Mary's phone rings. She takes the call and after a few minutes turns to you and the partner.] Oh no, we've had an emergency with some of our operations. I've got to cut this meeting short. We look forward to receiving your proposal!
You and the partner leave the meeting. On the way back to the office, you scratch your head, wondering what might go wrong with the audit given the RFP terms and the conversation you had with Mary.
- Identify at least three threats to auditor independence present in the case. Why might these threats negatively affect auditor independence?
- Identify at least three potential breaches of the fundamental principles of the CPA Code of Professional Conduct (excluding breaches of independence). Describe why the identified breaches could decrease the quality of the audit and/or increase the auditor's litigation risk. As the code of professional conduct varies by province, use the code of conduct for your own province. There is no need to include the specific rule number for each breach as long as you have addressed the substance/spirit of the rule.
- Discuss which of your identified threats and/or breaches are more serious than the others, ensuring that you discuss why the breach and/or threat is more serious. Discuss which of your identified breaches are clear-cut breaches of the CPA Code of Professional Conduct and which are more ambiguous and require the use of professional judgment to evaluate.
- Make a recommendation on whether you believe SwiftLightfoot should accept HM4K as a client. Your analysis should include a discussion of which threats/breaches are unacceptable and should prevent the firm from proceeding as auditor, as well as a discussion of which threats/breaches can remain while your firm is acting as auditor as long as safeguards are put in place. You may also want to consider operational matters related to the management philosophy and operating style of HM4K in your analysis.
- To: Memo's recipient
- From: Your name
- A subject line
- A date
- A separate paragraph for each topic included in the memo
- Your answers to the case discussion prompts
- A closing (e.g., Sincerely, Your name)
For background and information on The CPA Way, please visit the CPA Canada website.
HEALTHY MEALS 4 KIDS: PART 2
It is March 1, 2024. You, CPA, are a senior accountant at SwiftLightfoot LLP, a midsize national accounting firm in Canada. You are a member of the Fredericton office. You are told by a partner at your firm that you will be returning to the audit team of Healthy Meals 4 Kids (HM4K). You recall that the last time you worked for the organization, you raised numerous issues about the engagement with the partner. Shortly after receiving your memo, the partner on the file resolved the issues with the organization's audit. The audit proceeded smoothly afterwards.
The partner hands you his paper notes about the client (Exhibit 2-1). You review them carefully. You return to the partner's office later in the day. The partner tells you,I just got off the phone with Mary, the executive director of HM4K. Since we last spoke about HM4K, there have been some business developments. The organization ran low on cash during the year and had to obtain short-term bank financing to survive. Fortunately, its major donors, after reviewing last year's financial statements, also pitched in and managed to bring together the funds to keep the organization running solely as a not-for-profit organization (NPO). The organization still reports under Accounting Standards for Not-for-Profit Organizations. The terms of the bank financing aren't great for HM4K; the rate of interest varies depends on the organization's net assets. There are some more details that I took down in the form of notes from my meeting—you can review them here. Come and see me once you've had a chance to read them.
Required:CPA, I'm glad you're finished getting up to speed on the HM4K file. I'd like you to prepare a risk assessment for the audit of the organization, highlighting a few high-risk accounts. Once you're finished with that, please recommend a suitable basis for materiality and make a preliminary calculation. Don't worry about comparing preliminary materiality to last year's materiality. The organization has assets of $2,000,000, revenue in excess of expenses of $168,000, and net assets of $400,000 for the year ended March 31, 2024. Don't worry about the approach for now; we are going to conduct a substantive audit this year.
- Prepare a risk assessment for this year's audit. Hint: Be sure to include the developments at HM4K. This risk assessment should consider the risk of material misstatement at the overall financial statement level and at least two high-risk accounts. Make sure you make a firm conclusion about the risk of material misstatement at the overall financial statement level.
- Prepare an analysis of materiality. Hint: Ensure that you first discuss the users of the financial statements and their respective needs and sensitivities. Be sure to support this analysis as users in an NPO may or may not have the same needs as users in for-profit entities. Then select, justify, and recommend a basis for materiality. Prepare a preliminary calculation for inclusion with your memo.
- To: Memo's recipient
- From: Your name
- A subject line
- A date (use a fictitious date of March 15, 2024)
- A separate paragraph for each topic, including a response to the case discussion prompts
- A closing (e.g., Sincerely, Your name)
For background and information on The CPA Way, please visit the CPA Canada website.
EXHIBIT 2-1. Partner's notes about HM4K's new business developments
- The organization began to sell subscription meals with discounts and coupons, which is a brand-new type of transaction for the organization.
- Control recommendations from last year's audit, including regular bank reconciliations, have been implemented.
- The organization changed one of the bookkeepers during the year because they raised their prices by 5%. The executive director emphasized that it is her job to ensure the most economical choices as she manages donor funds.
- The organization's draft statements show a surplus of inventory at year-end. A supplier mentioned having twice received duplicate orders last year, though this issue was thought to have been resolved.
- The inputs for many of the organization's products were subject to sudden price changes due to unexpected inflation and supply chain volatility.
- The executive director fears an anticipated recession's impact on sales and the ability to offer meals to families in need, which is the organization's original purpose.
- It was discovered that an employee had been taking frozen meals home from the organization's product storage. This went unnoticed for several months.
- The bank balance was accidentally rendered into an overdraft position at one point due to the use of outdated bank statements during a purchase approval process.
- The organization obtained a line of credit to stave off financial difficulty and is now required to submit audited financial statements to their bank each year. The rate of interest on the line of credit is calculated based upon the net assets of HM4K. If the net asset position falls below a certain percentage of total assets, the interest rate on the loan increases.
HEALTHY MEALS 4 KIDS: PART 3
It is April 1, 2025. You, CPA, are a manager at SwiftLightfoot LLP, a midsize national accounting firm in Canada. You are a member of the Fredericton office. A partner at your firm informs you that you will be returning to the audit team of Healthy Meals 4 Kids (HM4K). You recall that the last time you worked for the organization was the audit for the year ended March 31, 2024. You were asked to draft the risk assessment and materiality planning documents for the audit. The audit proceeded smoothly for the 2024 year, and a clean audit opinion was issued. HM4K reports under Accounting Standards for Not-for-Profit Organizations (ASNPO).
The partner continues,CPA, it's great that you've been promoted. You are now the manager on the HM4K file. Congratulations! Unfortunately, much has changed at HM4K, and so, as the new manager, you will have to do considerable work in the planning stage. The organization has grown substantially since you last worked on the file as a senior. The organization has become tremendously successful this year. It has substantially increased its grant revenues and donations, scaled up operations to offer more families in need the assistance they require, and implemented new processes and systems to operate successfully at its new scale. This year the risk assessment, approach, and materiality calculations will be dealt with by the audit senior. As manager, you should focus on financial reporting issues and control weaknesses at the organization and create substantive audit procedures. The organization uses the deferral method of accounting for not-for-profit organizations (NPOs).
Review these documents to complete the necessary work. I've included the following documents:
- Exhibit 3-1, which details the financial reporting issues I'd like you to address for the client.
- Exhibit 3-2, which contains the information you'll need to recommend internal control improvements for this year.
- Exhibit 3-3, which contains the information you'll need to write our substantive procedures for the year.
- Exhibit 3-4, which contains the organization's draft financial statements for the year ended March 31, 2025.
You take the documents from the partner. Just before you leave, the partner remarks, “And get cracking, CPA! You're a manager now, and I'm depending on your work to ensure a smooth audit!”
You return to your office and review Exhibits 3-1 through 3-4. You then begin carefully—but quickly—constructing your analysis.
Required:
- Address the financial reporting issues introduced in Exhibit 3-1. Where appropriate, your analysis should also be supported by information in the financial statements in Exhibit 3-4. For each financial reporting issue, it might be helpful to structure your response using The CPA Way (Assess, Analyze, Conclude, Advise). Before analyzing the accounting issues, you should perform research into the correct accounting treatment under ASNPO.
- Prepare your internal control recommendations using the template and information contained in Exhibit 3-2. You should complete all elements of the template. Where appropriate, your analysis should also be supported by information in the financial statements in Exhibit 3-4.
- Prepare your substantive procedures using the template and information contained in Exhibit 3-3. You should complete all elements of the template. Where appropriate, your analysis should also be supported by information in the financial statements in Exhibit 3-4.
- To: Memo's recipient
- From: Your name
- A subject line
- A date (use a fictitious date of April 15, 2025)
- A separate paragraph for each topic, including a response to the case discussion prompts
- A closing (e.g., Sincerely, Your name)
Note: While this case takes place in the future, your response should assume that the accounting standards in effect on December 31, 2023, are in effect for the purposes of the case.
For background and information on The CPA Way, please visit the CPA Canada website.
EXHIBIT 3-1. Financial reporting information
You examine the following information carefully.
- In early fiscal 2025, HM4K applied for grant funding from the federal government. The federal government offered $100,000 in funds to qualifying NPOs. They defined qualifying NPOs as engaged in activities that address food insecurity. HM4K applied and was successful. The government stipulated that of the $100,000, $25,000 could be used for whatever purpose the organization would like. The remaining $75,000 must be used only for the purchase of machinery to manufacture food; otherwise, it must be repaid to the government.
- HM4K used $25,000 during the year to purchase ingredients to prepare healthy meals. They used the remaining $75,000 to purchase a specialized oven for use in cooking healthy meals. The oven is expected to be used for 3 years and have no residual value.
- The organization has recognized all $100,000 as revenue in the 2025 fiscal year. The organization's policy is to charge a full year of amortization in the year of acquisition.
- In early 2025, HM4K received a contribution from an organization called AlimentSanté (ASInc), a small grocery chain that operates in Eastern Quebec. ASInc had 100 excess jars of kimchi, a tasty Korean ferment, that were purchased accidentally. HM4K agreed to take and distribute the jars. ASInc usually sells a smaller version of the jars of kimchi (500 g each) for $7.95 each; however, these jars are 750 g each.
- When the jars of kimchi were received, HM4K noticed some of the labels were damaged and decided to relabel many of the jars. Two volunteers offered to complete this work, and it took them about 16 h each to complete the job. A local nutritionist volunteered to create a “fact sheet” about the probiotic benefits of fermented products like kimchi free of charge, and HM4K accepted this offer, distributing the fact sheet to recipients of the jars. HM4K generally only includes required allergen and nutritional information with their products, and this fact sheet includes information significantly beyond the required elements. The website of the nutritionist shows that a similar service generally costs about $2,500.
- In this year, HM4K began to capitalize the amounts related to contributed goods and services. As such, the organization recorded a “contributed asset” that was included in the capital assets account, totaling $3,615 ($795 for the jars of kimchi, $320 for labeling services, and $2,500 for the nutritionist's services).
EXHIBIT 3-2. Payroll process information
The email continues,CPA, I'm including in this email all the details I have about HM4K's internal controls over financial reporting. I have concerns about the payroll process at HM4K. In prior years, the organization was using an outsourced service provider to process payroll, but HM4K has decided to return this function in-house. They think it will be cheaper to do themselves and, as you know, NPOs are typically hard up for financial resources. The following is the new process for payroll processing at HM4K:
- When an employee is hired, the administrative assistant at HM4K enters their details into the payroll system, including identifying information, salary, tax deductions, and their position/title.
- Every 2 weeks, the administrative assistant collects timesheets from all hourly employees. Salaried employees are paid in equal installments every 2 weeks. The administrative assistant inputs the hours for hourly employees into the payroll system, and the payroll system computes the tax deductions for each employee and produces pay stubs. Some employees fill out their timesheets at the last minute, and the administrative assistant enters all time reported as is.
- Once the administrative assistant is finished entering time, they process the payroll—the software automatically transmits a file to the bank, and the bank pays all employees the amounts indicated in the transmitted file.
- After the employees are paid, the administrative assistant prepares the payroll journal entries and sends them by email to the organization's controller. The controller then posts the entries to the accounting system. This is the first time the controller is involved in the payroll process.
CPA, I'd like you to identify the risks involved in this system of processing payroll. I'd like you to describe the risk, tell me why it matters, and come up with a recommendation for a strong internal control the organization could implement. Use the attached template to help format your response. I'd like you to be as specific as you can. Try to come up with three control weaknesses, their implications, and recommendations for improvement.
| Weakness (description) | Implication (what could go wrong?) | Recommendation (control to be implemented) |
|---|---|---|
EXHIBIT 3-3. Substantive procedure information
CPA, I'm including in this email my concerns about audit procedures needed for the HM4K audit. I have a few concerns that need to be addressed, as follows:
- I'm concerned about some of the expenses. Mary mentioned that when the organization pays its property insurance bill for the year (on November 1 each year), they have been expensing the full amount. The amount to be paid for each period starting November 1 and ending October 31 has been different in each year. Please create a procedure that addresses this potential issue for insurance expense.
- When I visited HM4K's warehouse, I noticed that there was a new forklift, but I'm not sure whether it belongs to HM4K as the warehouse is shared with another NPO. I noticed a forklift on the asset register, though. Please create one procedure that addresses this issue.
- Please prepare three additional procedures that address high-risk account balances you have identified, ensuring that you note the account at risk, including a description of the risk using case-specific facts, the assertion the procedure addresses, and a specific procedure that addresses the risk and assertion presented. Use the following template to format your procedures, and be specific, CPA! The juniors on the team need to be able to complete these procedures with minimal assistance from you as manager!
| Risk (description) | Assertion addressed | Procedure (be specific) |
|---|---|---|
EXHIBIT 3-4. Draft financial statements
| Statement of Operations | ||
|---|---|---|
| For the years ended March 31, 2024, and March 31, 2025 | ||
| 2025 | 2024 | |
| Revenues | ||
| Revenue from sale of meals | $ 742,530 | $ 501,365 |
| Donations | 663,266 | 408,876 |
| Grants | 100,000 | – |
| Investment income | 6,710 | 7,813 |
| Total revenues | 1,562,506 | 918,054 |
| Expenses | ||
| Program costs | 1,005,813 | 574,365 |
| Salaries and wages | 110,178 | 40,780 |
| General and administrative | 72,536 | 22,100 |
| Fundraising | 21,493 | 8,357 |
| Utilities | 13,435 | 6,353 |
| Insurance | 12,000 | 6,000 |
| Rent | 82,000 | 22,100 |
| Interest | 70,000 | 70,000 |
| Total expenses | 1,387,455 | 750,055 |
| Excess of revenue over expenses | $ 175,051 | $ 167,999 |
| Statement of Financial Position | ||
|---|---|---|
| As at March 31, 2025, and March 31, 2024 | ||
| 2025 | 2024 | |
| Assets | ||
| Cash | $ 125,367 | $43,212 |
| Accounts receivable | 10,000 | – |
| Inventory | 50,000 | 25,000 |
| Capital assets, net | 1,208,869 | 800,000 |
| Land | 1,100,000 | 1,100,000 |
| Total assets | 2,494,236 | 1,968,212 |
| Liabilities | ||
| Accounts payable | 32,143 | 11,563 |
| Deferred contributions | 728,325 | 556,064 |
| Line of credit | 72,000 | – |
| Long-term debt | 1,000,000 | 1,000,000 |
| Total liabilities | 1,832,468 | 1,567,627 |
| Net assets | ||
| Endowments | 299,545 | 133,250 |
| Unrestricted net assets | 362,223 | 267,335 |
| Total net assets | 661,768 | 400,585 |
| Total liabilities and net assets | $ 2,494,236 | $ 1,968,212 |
HEALTHY MEALS 4 KIDS: PART 4
It is May 1, 2025. You, CPA, are a manager at SwiftLightfoot LLP, a midsize national accounting firm in Canada. You are a member of the Fredericton office. A partner at your firm informs you that you will be responsible for dealing with some client queries related to the audit for Healthy Meals 4 Kids (HM4K). You have completed your fieldwork and have nearly completed the audit report.
CPA, it's great that the HM4K audit went so smoothly. The audit report is nearly complete and will be qualified only for contributions. The organization was collecting cash for the first time at several of its events. This was the first year they ran events like this. The amounts were small enough that no donation receipts were issued. Any time cash was collected, it was counted at the end of the night, deposited at the bank, and recorded as contributions in the period. I'd like you, as a manager, to deal with some important client queries. Mary, the executive director of HM4K, emailed me yesterday with some questions:
We were told by one of the audit seniors after you assessed our payroll process that at the completion of the audit, we would be given a “management letter” with more details. What is that? What are the additional details? Is it a bad thing?
We think we may not need as much credit in the future. We discussed it with our bank, which has provided us with a new draft lending agreement, and instead of saying that the organization requires an audit, it just says the bank requires a professional opinion that offers “some level of assurance.” What does this mean? Can you still help us somehow even if we don't pay for an entire audit?
Required:
- To: Memo's recipient
- From: Your name
- A subject line
- A date (use a fictitious date of May 15, 2025)
- A separate paragraph for each topic, including a response to the case discussion prompts
- A closing (e.g., Sincerely, Your name)
For background and information on The CPA Way, visit the CPA Canada website.
