Canadian Child Adoptions Inc. (CCA)
Canadian Child Adoptions Inc. (CCA) is a consulting company wholly owned by Roger Tremblay, a wealthy, recently retired lawyer. CCA helps Canadian families adopt infants from other countries. Typically, these infants have been abandoned or have lost their parents to disease or war, and are being sheltered in government-sponsored orphanages. Further information on the activities of CCA can be found in Exhibit I.
CCA is a full-service coordinator, helping parents with all aspects of the international adoption process (Exhibit II). The company charges a fee to cover the costs associated with the adoption process and its consulting service. CCA is required to be registered as an international adoption coordinator with the Canadian government, and as such must follow certain criteria set out by Citizenship and Immigration Canada (CIC).
Effective July 1, 2007, CIC now requires all registered coordinators to submit audited financial statements in accordance with GAAP, and to hold fees collected in trust on behalf of the parents. The fees requirement also applies to all adoptions already in process. Throughout the adoption process, CCA can only withdraw funds from the trust to pay for adoption-related expenses. Once an adoption has been finalized, CCA can withdraw the remaining funds.
CCA's financial statements have never been audited or reviewed and the company relies on the services of a full-time bookkeeper to complete its internal financial statements. The financial statements for the most recently completed year are presented in Exhibit III, and additional information is presented in Exhibit IV.
It is August 15, 2008, and you are a CA with the firm of Lawson Howard Chartered Accountants (LH). The partner on the engagement, Kate Howard, has asked you to complete the initial planning memo for the CCA audit engagement. She has specifically stated that all of the initial client acceptance procedures have been performed, and she is comfortable that CCA meets the firm's criteria as a new client.
Adapted from Canadian Institute of Chartered Accountants

EXHIBIT I
FURTHER INFORMATION ON THE OPERATIONS OF CCA
The international adoption process can be daunting. CCA managers assist potential adoptive parents with every step of the process, from the initial application through to the post-adoption report. Managers also travel with parents to the countries where the adoptions take place, usually in groups of 10 families or fewer. Adoptive parents must cover their own travel expenses.
Upon signing a contract, CCA charges a flat fee of $25,000, regardless of which country the parents adopt from. This fee pays all costs related to the adoption (averaging $20,000), and must also cover CCA's administrative and overhead costs.

The following are the countries CCA supports through its international adoption assistance programs, and the number of adoptive families currently awaiting child proposals from each country:

Pending Child Countries Proposals China 68 India 58 Pakistan 47 Ethiopia 40 Sudan 38 Haiti 10 Philippines 8 269

Due to local hostilities and the deteriorating relationship between the Sudanese and Canadian governments, Sudan recently announced that they will not permit adoptions by Canadian residents after October 1, 2008.
To replace the number of adoptions CCA will lose as a result of the decision made by the Sudanese government, the company is considering expanding its list to include countries like Vietnam, Cambodia, and Afghanistan. However, CCA does not have experience with these countries, or any formal criteria for determining whether a country should be added, so the managers are not sure how they should proceed.

EXHIBIT II
INTERNATIONAL ADOPTION PROCESS
Several steps must be completed in order to adopt a child from a foreign country. While the steps vary slightly between countries, the adoption process is similar. 1. Adoption Application - The adoptive parents complete an application in the format prescribed by the foreign authorities. A social worker performs a home assessment to ensure the applicants would be suitable parents for international adoption. The social worker prepares a report and forwards it to the foreign authorities. There is a long waiting period (anywhere from 6 to 24 months) before the adoptive parents receive a proposal from the foreign country. 1. Child Proposal/Acceptance - The foreign authorities propose a child for adoption. The adoptive parents must indicate within 48 hours whether they accept the proposed child. 1. Adoption Finalization - About four weeks after the Child Proposal is accepted, the parents travel to the country to finalize the adoption. This includes paying legal fees, a mandatory orphanage donation, a medical examination fee, and other government fees. Typically this step takes between 10 and 12 days. 1. Post-Adoption Reports - Foreign countries require a progress report six months after adoption in order to ensure the child's well-being. The one-page report must be prepared by a social worker.
Direct Adoption-Related Costs
Although the costs can vary significantly between countries, the estimated average adoption-related costs are as follows:

Adoption application (including home assessment report) $ 4,100 Accommodation, airfare, and other travel costs for CCA staff only 3,500
Legal and court costs in foreign country 3,200
Mandatory donation to orphanage 4,000
Medical examination in foreign country 900
Other foreign government fees 4,300 20,000

EXHIBIT II
CANADIAN CHILD ADOPTIONS INC.
BALANCE SHEET
As at June 30
(unaudited)

2008 2007

Assets
Current Assets Cash $2,097,474 $2,002,308 Accounts receivable 125,657 76,904 Prepaid insurance 35,500 26,575 2,258,631 2,105,787 Capital assets 127,768 123,459 $2,386,399 $2,229,246

Liabilities
Current liabilities Accounts payable and accrued liabilities $ 391,062 $ 358,131 Wages payable 43,567 35,678 Other current liabilities 170,968 164,298 605,597 558,107 Shareholder loan 400,000 400,000 Shareholders’ equity Common shares 100 100 Retained earnings 1,380,702 1,271,039 1,380,802 1,271,139 2,386,399 2,229,246

EXHIBIT III (continued)
CANADIAN CHILD ADOPTIONS INC.
INCOME STATEMENT For the years ended June 30
(unaudited)

2008 2007
Revenue
Adoption fees $5,912,500 $5,467,500 Interest and other 20,542 18,674 5,933,042 5,486,174 Expenses Adoption application fee 1,027,915 965,830 Travel costs 765,745 726,706 Legal and court costs 675,420 660,398 Mandatory orphanage donations 827,600 796,500 Medical examinations 189,675 175,678 Miscellaneous foreign government fees 965,405 1,005,345 Administrative wages and benefits 485,672 421,876 Foreign country assistants’ wages 250,224 345,698 China subsidiary operations (Exhibit V) 267,985 - Rent 145,985 154,325 Other expenses 182,320 170,986 5,783,946 5,423,342
Income before tax 149,096 62,832
Income tax 39,433 16,789
Net income $109,663 $46,043
EXHIBIT IV
ADDITIONAL INFORMATION ON THE FINANCIAL SI'ATEMENTS
At June 30, 2007, 242 adoptive families were awaiting a Child Proposal. CCA completed 203 adoptions during the fiscal year. At June 30, 2008, 269 adoptive families were in the adoption process, and all of them were awaiting a Child Proposal.
CCA records revenue when payments are due from adoptive parents. Half of the total payment is due up front (with the adoption application) and the remaining half is due one month prior to travel. Accounts receivable at June 30, 2008, represent fees not yet received for a trip to China in late July 2008. All amounts were eventually collected.
CCA records an expense when it receives the invoice. In the absence of an invoice, the expense is recorded when paid. Certain countries require cash payments, for miscellaneous costs such as orphanage donations, so CCA maintains bank accounts or similar facilities in all the countries to which it travels so staff can quickly obtain cash in local currencies. Most cash payments are provided on the same day that the adoptive parents take charge of the infant. Payments are usually due in local currencies or US dollars.
None of the parents awaiting an adoption from Sudan have asked for a refund yet, and CCA hopes they will try to adopt from another country. These parents will need to go through the adoption process again, potentially all the way back to the initial application.
The $25,000 fee has been sufficient to cover CCA's minimal costs and allow the operations to continue. Roger has not focused on the detailed financial information, and really only monitors the financial affairs to ensure there is enough money available to pay the bills. He does not know the detailed costs for each country.

EXHIBIT IV
CHINA SUBSIDIARY OPERATIONS
During fiscal 2008, CCA incorporated a wholly-owned subsidiary in Beijing, China, to deal with administration issues in China. The company maintains an office in Beijing that employs one full-time person. It holds a bank account, and receives funds from CCA for expenditures made in China. A summary of the expenditures made in fiscal 2008 is as follows (amounts are in Chinese Yuan):

¥ 2,103,492 0.1274
$267,985
763,125 ¥ 763,125
331,210 436,534 101,567 142,908 135,596
35,768 156,784
Accommodation, airfare, and other travel costs for CCA staff only
Legal and court costs
Required donations to orphanages Medical examinations
Miscellaneous government fees
Wages and benefits
Rent
Furniture, fixtures, and computers
Total expenditures in Chinese Yuan
Exchange rate at June 30, 2008
Total expenditures in Canadian dollars