NORTHERN FRONTIER PARK
Assume you are an audit senior employed by an international public accounting firm. On
May 1, 2016, Ms. Benice, a partner in the firm, invites you to her office to discuss a special
engagement that you will be supervising. To ensure the engagement runs smoothly, she has
asked you to summarize–in a written planning memorandum–all important risks and factors to be
considered when conducting the engagement.
The client for the special engagement is Northern Frontier Park (NFP), a privately-held
company that operates a safari-style wildlife park in the northern Ontario. Until late last year,
NFP had been owned and managed by Mr. Kramer, founder and Chief Executive Officer (CEO).
Upon Mr. Kramer’s death in 2015, all shares in the company were distributed to his family.
Because no one in Mr. Kramer’s family wants to take over the business, the family will sell
100% of the NFP shares at the end of the current fiscal year to Newman, the current controller
and Chief Financial Officer (CFO) of NFP. Because NFP is a private company, a market price
for the shares is not readily available. Instead, the purchase/sale price will be based on a multiple
of five times the income earned from “continuing operations” in the year ended May 31, 2016,
calculated using ASPE. To ensure NFP’s reported net income is appropriate, the Kramer family
has engaged your firm to provide assurance that the year-end financial statements are reliable
and are representative of on-going operations. In past years, NFP’s financial statements always
have been prepared by the CFO without audit or review.
Similar to wildlife safari parks in Africa, visitors drive through NFP’s 3200-acre park,
which is home to over 100 species of native animals, birds, and fish. Although hunting is not
allowed in the park, fishing is permitted from man-made lakes that NFP constructed and began
stocking with fish two years ago. The NFP park has become a popular year-round tourist
attraction, with the number of vehicle admissions increasing from 40,000 in 2008 when the park
opened to over 55,000 in the 2015 fiscal year. Most of NFP’s revenues are earned through park
admission and hotel accommodation fees. Each vehicle admitted to the park is charged a $20
entrance fee, and approximately one-third of all park visitors stay in NFP’s 85-room hotel. With
an average nightly rate of $110, hotel occupancy rates typically average 60% each year. Most
purchases and payments relate to animal and fish acquisition, feeding, and medical care, as well
as to hotel administration and operations.
To assist you in preparing the planning memorandum, Ms. Benice has provided you with
unaudited financial statements prepared by the CFO (Exhibit 1) and other relevant client
information (Exhibit 2). Upon reviewing this information, you recognize that because today’s
date (May 1) precedes NFP’s year-end (May 31), only 11 months of operations are included
presently in NFP’s income statement. Ms. Benice’s discussions with the CFO indicate that
although the balances on the 12-month income statement will be larger, their relative percentage
of revenues (as shown) are unlikely to change.
1. Identify two individuals or groups, other than the accounting firm, who benefit from this
special investigation. Explain how each beneficiary is likely to be affected by the
resulting financial statements.
2. Evaluate the following accounting decisions in 2015 using the “Diamond Approach” by
identifying the chosen accounting method, any shortcomings in this chosen method,
evaluate the issue through a balanced discussion by applying judgement
criteria/arguments and present any adjusting entries to correct any shortcoming. All
adjustments must comply with generally accepted accounting principles for private
enterprises. Ignore any tax effects
a. The write-off of fish stock
b. The change in accounting for animals from specific identification to average cost
c. The change in the useful life of hotel buildings
d. The liability accrued for damaging park ecology.
3. Discuss Newman’s bias, the degree to which this bias may be influencing his accounting
choices and the resulting effects of this bias to Newman and the Kramer family.
This case is adapted from Northern Frontier Park by Fred Phillips and Roger D. Martin as
published in Issues in Accounting Education Vol. 13, No. 4 November 1998. Reprinted with
permission from Phillips, F., and R. D. Martin. 1998. Instructional case: Northern Frontier
Park. Issues in Accounting Education (November): 1005-1018. Copyright, American Accounting
NORTHERN FRONTIER PARK
excerpts from the
UNAUDITED STATEMENTS OF INCOME AND RETAINED EARNINGS
(thousands of dollars)
Hotel operating costs
Animal feed and care
Cost of animal sales
Depreciation & fish write-offs
Restoration and other costs
Income before income taxes
Retained earnings, beginning
Retained earnings, end
NORTHERN FRONTIER PARK
excerpts from the
UNAUDITED BALANCE SHEET and NOTES TO THE FINANCIAL STATEMENTS
(thousands of dollars)
Hotel customer accounts receivable
Less: Allowance for doubtful accounts
Animal and fish stock
Less: Accumulated amortization
Significant Accounting Policies
Animal and fish stock — In accordance with industry practice, the stock of fish and animals is
reported at the lower of cost or market value. Market values are estimated using current
Capital assets — Capital assets include land, man-made lakes, hotel buildings, and equipment.
Hotel buildings and equipment are amortized on a straight-line basis over their estimated useful
lives. In 2016, the remaining estimated useful life of hotel buildings was reduced from 25 to 18
years thus increasing depreciation expense by $15. Land and man-made lakes are not amortized.
Contingent Liabilities — NFP does not routinely collect the scientific data needed to evaluate the
ecological health of its park, yet significant growth in visitors over the past 5 years is thought to
be damaging park ecology. In 2016, NFP accrued a liability in the amount of $150 (thousand) for
possible future environmental restoration costs that may be incurred as a result of deteriorating
OTHER CLIENT INFORMATION
Beginning the day NFP was founded, Mr. Kramer carefully controlled every aspect of NFP’s
operations, using his extensive knowledge of veterinary care, marketing, and federal laws and
regulations. As CEO, Mr. Kramer was respected by everyone—not only NFP’s employees and
customers, but also concerned environmental and animal-rights activists. On the financial side,
Mr. Kramer worked closely with Newman, Controller and CFO, to design and implement a
strong accounting system. All purchases of fish and animals for the park were approved by Mr.
Kramer; hotel profitability was reviewed by Mr. Kramer and Newman on a monthly basis; and
park admission revenues and cash receipts were compared daily to vehicle counts obtained from
monitors installed at the admission gates. A perpetual inventory system was introduced to
monitor quantities of fish and animals.
The perpetual inventory system was implemented in the 2015 fiscal year to track quantities of
fish and animal stock present on the NFP park grounds. NFP personnel easily can track the
number of fish released into the man-made lakes, as well as the number of fish caught and
removed. Unfortunately, the number of fish births and mortalities are more difficult to track.
NFP estimates these numbers based on its prior experience, allowing for possible changes in
environmental conditions. Newman has described December 2015 as an unusually harsh winter
month and, accordingly, has had to “override” the perpetual system by writing-off significant
quantities of fish stock. The write-off resulted in 20% of the December 2015 fish stock balance
($40) being charged as an expense on the income statement.
In contrast to fish stock, animal stock apparently survived the harsh weather with much greater
success. In fact, Newman mentioned that 30 newborn animals survived in 2016, as compared to
only 20 in each of the prior three years. Many of these newborn animals were sold to private
zoos and other animal parks in 2016; consequently, animal sales revenues have increased in the
The growth in successful animal births also has led Newman to reconsider the accounting policy
used to record and update animal stock costs. The animal stock account primarily includes costs
for adult animal purchases, although some birth-related medical care costs also are included. In
the past, these animal costs were assigned to each individual animal using the specific
identification inventory method. Newman apparently found that method overly cumbersome, and
decided to change to an average cost method for all animals in January 2016. Consequently,
when newborn animals now are sold, the average cost of animal stock at the time of sale is used
to determine the cost of animal sales to be expensed on the income statement. The animal ending
inventory was $30 lower as a result of this change.