The Audit of Smackey Dog Food, Inc.
AUDIT OF SMACKEY DOG FOODS, INC
The Smackey Dog Food, Inc. is a family owned business. It was started by three sisters, Sarah, Kim and Jillian, in the kitchen of their home. They lived in a suburban area of Chicago, Illinois. Their business is making all natural dog food. After using their own dogs and the neighbor’s dogs as test subjects, it was discovered by local vets, pet stores and grocery stores. These local places began to distribute the dog food. The demand for their food began to increase and they moved their business to a larger facility and hired additional workers. As compared to competitors, Smackey Dog Food, Inc., began to rise significantly. Due to the increase in sales, the sisters decided to expand and add a new division called Best Boy Gourmet. In order to secure an additional loan for their expansion, the bank has requested an audit of the current financial statements. Sarah, the President and General Manager of the company is sure the company will be able to get the loan based on projections from Jillian and her sales team. Keller CPA’s was hired to perform the audit. My team and I will create a plan for the audit and form an opinion about the financial statements which will be reviewed by the bank in order to get the $150,000 loan. Q1. Discuss how the SEC has influence (if any) over the audit of Smackey Dog Foods, Inc. The SEC (Securities and Exchange Commission) has influence over this audit because Keller CPA’s have to meet the required standards as set by AICPA Code of Professional Conduct. The auditors have to make sure they can maintain independence, responsibilities, the public interest, integrity and objectivity. Independence and integrity may become a problem due to the relationship between Pete and Alan. If this were to prove a problem, the SOX regulation would come into play. Q2. Discuss the essential activities involved in the initial planning of an audit. How do these all specifically relate to the Smackey Dog Food client? The essential activities involved in the initial planning of an audit that are specifically related to the Smackey Dog Food client are the following: 1. Understanding the business. Keller’s CPA’s admit to not knowing too much about the dog food business. They will have to rely on any knowledge they have from other food manufacturing companies and adapt it to Smackey’s Dog Food. 2. Assess the business risks. Waste is one the factors that can cause major material misstatements. Also the problem they have with restocking in a timely manner. This may have a major effect on Smackey’s objective to expand. 3. Perform preliminary analytical procedures. In order to show where there might be a risk of misstatements, Keller CPA’s would have to compare Smackey’s with other dog food manufacturers. 4. Set materiality and assess acceptable audit and inherent risk. Since materiality is a relative rather than an absolute concept, the auditor would have to use his/her own judgment in order to assess any acceptable audit and/or inherent risk. 5. Develop an overall audit plan and program. The audit team needs to develop a plan to reach audit risk objectives in order to provide a reasonable basis for the audit’s report and opinion. Q3. Discuss the 4 stages of the audit and how each applies to the Smackey Dog Foods: 1. Planning is the first stage of the audit. The auditor needs to understand how business is done. In this case, they need to know how Smackey Dog Food operates and how it compares to other dog food manufacturers. They would need to figure out why Smackey’s business is booming while their competitors are failing. In this stage, they also need to list what documentation they would need, look at previous audits and request the necessary statements. They also have to create the scope of the audit and set the objectives. 2. The next stage is...
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