This paper analyzes a fictional privately held company, Smackey Dog Foods, Inc. as well as its fictional auditor, Keller CPAs. The analysis is based on a Keller Graduate School of Management scenario and a series of questions developed to address concepts learned throughout the External Auditing course. Concepts include: SEC influence, audit planning, audit stages, internal controls, confirmations, sample size, obtaining evidence, inventory, warehousing cycles, Professional Rules of Conduct, and auditor’s legal liability. Each of these auditing concepts are explained and then applied to the scenario between Smackey Dog Foods, Inc. and Keller CPAs.
Questions and Answers
Discuss how the SEC has influence (if any) over the audit of Smackey Dog Foods, Inc. The Securities and Exchange Commission (SEC) has control over rules regarding “companies publicly offering securities for investment dollars” (U.S. Securities and Exchange Commission, 2012). Although the SEC is not in control over the rules regarding privately held companies, their influence over auditing exists regardless of control being public or private. This is because the SEC’s opinion is considered by the Financial Accounting Standards Board (FASB) which established the generally accepted accounting principles (GAAP) (Arens, 31). These principles are what should be followed by Smackey Dog Foods, Inc. (Smackey) when recording their business transactions and completing their financial statements. Keller CPAs (Keller) will be auditing Smackey to ensure compliance with the GAAP. So although the SEC does not have authority over Smackey since it is a private company, the indirect relationship exists through the influence that the SEC has over the GAAP. An additional position can be taken on the SEC and its influence over the audit through the auditors. Since the SEC has many certified public accountant (CPA) firms that represent clients that are publicly held, the SEC is involved in creating rules that CPA firms must follow. Although the American Institute of Certified Public Accountants (AICPA) maintains the code of professional conduct for CPAs, the SEC will offer input on those rules, just as it does for the GAAP (Arens, 40). Keller will need to follow this code when acting in a professional capacity. 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 initial planning of an audit is “deciding whether to accept or continue doing the audit for the client, identifying the client’s reasons for the audit, obtaining an engagement letter, and developing an audit strategy” (Arens, 234). Keller chose to take on the new client, Smackey, despite no knowledge of the dog food manufacturing business. It is late in the year to accept a new client, but they do so anyhow and without regard to the further shortened time line on account of a planned vacation. All of these should have been considered a reason not to take on the new client, but were ignored by Keller because they needed more work. Keller should have gathered information on the reason for the audit, which is to obtain a bank loan for further expansion. This information will help Keller identify areas of interest for the audit or create additional support for the position of not taking on the new client, this new businesses trying to expand to quickly can often fail. This means there is a risk that the bank with see Keller liable if Smackey fails and they approved the loan based on the audit. Keller will need to come to an understanding with Smackey and solidify the arrangement by obtaining an engagement letter. This will outline all of the expectations for both parties as well as the deadlines and time frames of the audit given the short turn around that will be needed to complete it. After that Keller will begin to develop the audit strategy. Keller will want to continue the audit plan to include:...
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