Discuss how the SEC has influence (if any) over the audit of Smackey Dog Foods, Inc.
The Securities and Exchange Commission has a significant influence on the audit of Smackey Dog Foods, Inc. By Keller CPAs. The SEC's influence comes primarily by the audit standards that have to be applied to the business and independence is one of the principles of the AICPA. The other principles are responsibilities, the public interest, integrity, objectivity and independence, due care, and scope and nature of services. The Sarbanes-Oxley Act of 2002 introduced many new requirements. These requirements relate to: the independence of audit committee members; the audit committee's responsibility to select and oversee the issuer's independent accountant; procedures for handling complaints regarding the issuer's accounting practices; the authority of the audit committee to engage advisors; and funding for the independent auditor and any outside advisors engaged by the audit committee (U.S. Securities and Exchange Commission, N.d.).
Q2: Discuss the essential activities involved in the initial planning of an audit. How do these all specifically to the Smackey Dog Food client?
The auditor considers many factors in determining the nature, timing, and extent of auditing procedures to be performed in an audit of an entity's financial statements (PCAOB, N.d.). The following are five steps in the essential activities involved in the initial planning of an audit and as they relate to Smackey Dog Food, Inc.
1. Understand the client's business and industry.
2. Assess client business risk.
3. Perform preliminary analytical procedures.
4. Set materiality and assess acceptable audit risk and inherent risk.
5. Develop overall audit plan and audit program.
Smackey's representatives must conduct each step rigorously to ensure that the company is not only in compliance, but also is making good use of managerial accounting and the company's assets. The financial auditing quality depends, among others, of the quality of the information the auditor avails of in judging the compliance with accounting principles and conventions (Georgescu, Betianu, & Macovei, 2006).
Q3: Discuss the 4 stages of the audit and the major activities performed by the auditor in each phase. Give an example of how each of these specifically applies to the Smackey Dog Food, Inc. audit. For instance, examine the apparent internal control weaknesses and possible negative outcome of each.
The four stages of audit and how each of the major activities specifically applies to the audit of Smackey Dog Food, Inc. are:
1. Planning and risk assessment. This will require background information about the company and its industry.
2. Test of internal controls. The audit team can perform tests of controls by designing various test measures and re-performing the client procedures.
3. Substantive tests. These should likely be performed on the balances of the accounts receivables and inventory accounts. Substantive can also be performed on tests of transactions, analytical procedures and test of details of balances.
4. Audit finalization. This is the stage where the audit results are compiled and presented so that they can be utilized by management.
The audit engagement decision is the result of two sets of decisions: the prospective client's and the proposed audit firm's (Pacini, N.d.)
Q4: Describe Keller CPAs' responsibilities related to communications regarding internal control matters. What internal controls issues do you identify?
Generally accepted auditing standards and professional conduct requires that the auditor communicate, in writing, to management and those charged with governance, significant deficiencies and material weaknesses identified in an audit. The current issues with the internal process that were identified are as follows:
1. Granting of commissions to sales people based on estimated sales.
2. Segregation of duties as regards the handling of inventory.
3. Lack of control procedures and guidelines in handling returns.
4. Lack of control procedures and guidelines in handling and recording accounts receivable.
Q5: You decide that you will address Smackey Dog Food, Inc.'s accounts receivables through confirmations. Discuss the various types of confirmations and what forms you will implement and why.
There are two general classifications of accounts receivable confirmation, positive and negative confirmations. Positive confirmations are confirmations in which the debtors are asked directly to confirm the balance of the accounts receivable that is shown on the internal books. However, a negative confirmation requests debtors to respond only when they disagree with the stated amount in the confirmation form. Therefore, a negative confirmation only requires a response if there is a discrepancy (Investopedia, N.d.).
Q6: What are the major factors affecting sample size for confirming accounts receivable?
The following are factors affect the sample size for confirming accounts receivable:
1. Tolerable accounts receivable and financial statement misstatement.
2. Inherent risk which is dependent on the size of total accounts receivable, the number of accounts, prior-year results, and expected misstatements.
3. Control risk.
4. Achieved detection risk based on other substantive tests.
5. The type of confirmation.
Q7: A major issue in verifying the ending balance in property, plant and equipment is the possibility of legal encumbrances. Discuss what specific concern do you have. Describe the procedures your firm will perform to obtain evidence about existing legal encumbrances.
Keller CPAs will need to perform the following to obtain evidence about existing legal encumbrances include:
1. Inquiry with property, plant and equipment custodians
2. Review of minutes of meetings
3. Review of items noted during property, plant and equipment inventory observations
4. Confirmation of the client's liabilities
5. Reading and reviewing lease agreements
6. Reading and reviewing property, plant and equipment purchase contracts and agreements
The various steps can help identify whatever liens to the property, plant or equipment might exist.
Q8: The client wants to know if you will be present at the year-end inventory. What is your decision and why? What role or actions will you take at the inventory if you decide to attend the inventory. Why?
Yes, the firm should be present. The presence of the audit team provides assurance that the physical count was carried out correctly. Representatives can ensure that the counting methods are effective as well as inspect the actual count sheets and help reconcile whatever accounts need adjustment.
Q9: Considering the general six functions that make up the inventory and warehousing cycle for Smackey Dog Foods, Inc., identify the related documents and/or records that would be used. From your analysis of the internal controls related to the inventory and warehousing cycle of Smackey Dog Foods, Inc., what internal control weaknesses exist?
1. Processing of purchase orders - purchase requisitions, quotations from suppliers, and purchase orders
2. Receipt of purchased materials - receiving report
3. Storage of materials or inventory - materials requisition form
4. Processing raw materials - job cost sheet, process cost sheets
5. Storage of finished goods - sales invoice, sales order form.
6. Shipping finished goods - shipping form and invoices.
Internal control weaknesses observed were that there were no procedures for the receipt, storage and disposal of returned dog foods. There were also no processing of purchase orders, receipt of purchased materials, storage of raw materials and finished goods. The internal controls for these processes were inefficient and noncompliant.
Q10: Discuss if Keller CPAs or its auditors are breaching any Professional Rules of Conduct and why or why not?
Yes, there were many rules of professional conduct that were breached. One apparent violation is the confidentiality agreement. A member of the audit team discussed details of the audit to Alan over few beers. This is certainly a violation of professional ethics.
Q11: Discuss the CPA firm's legal liability concerns for this audit if they make a material unintentional or intentional mistake. Include any other legal liability concerns regarding possible Professional Rule violations.
The auditing firm assumes that a failure of an audit to identify material misstatements which in turn leads to an incorrect audit can put the firm in a bad position.…