Worksheet for You Decide
Discuss how the SEC has influence (if any) over the audit of Smackey Dog Foods, Inc. Solution:
Since Smackey is a private company, the SEC regulations are not required. The SEC requires only public companies to offer full disclosure on their financial statements. Private companies are not bound to such strict disclosure requirements.
Discuss the essential activities involved in the initial planning of an audit. How do these all specifically to the Smackey Dog Food client? Solution:
There are four things that an auditor needs to assess prior to performing an audit: 1. The auditor must decide whether or not to accept the audit 2. The auditor must understand the client’s needs for the audit which will aid the auditor in planning out the audit 3. The auditor and client must come to an agreement about “the terms of the engagement” (Arens, etal, 2010) 4. The auditor must develop a strategy and gather all auditors and specialists When it comes to Smackey:
1. The auditor accepted Smackey as a client
2. The auditor was informed that Smackey needs the audit to obtain more financing from the bank – the bank required an audit 3. The auditor and Smackey need to talk and come to an agreement about the “terms of the engagement” (Arens, etal., 2010) as it does not appear that has yet occurred 4. Since the auditor has never audited a dog food manufacturer before, aside from Peter, Ben and Maureen (the auditors assigned to this audit), they may want to hire a specialist who has audited this type of business in the past
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. Solution:
I: Plan and design. The auditor must know what the client is seeking to gain from the audit. In this case, Smackey needs the audit to get another loan from the bank. The auditor must assess all risk prior to committing to the engagement. They also need to be sure they are able to provide due care and adhere to GAAS (Chapt 7 – Accepting the Engagement and Planning the Audit)
II: “Perform tests of controls and substantive tests of transactions” (Arens, etal., 2010). The auditors need an understanding of the client’s operations. With Smackey, the auditors should walk through the plant to see what the operation entails and see any/all physical controls that exist. It appears that this had been performed as Ben and Maureen have observed returned dog food eventually being loaded into an employee’s car. The auditors must also get an understanding of how the sisters work together and how they deal with their financials and employees. As related parties their actions could significantly alter or cause issues with financial statements.
III: “Perform analytical procedures and tests of details of balances” (Arens, etal., 2010). Here the auditors will perform tests that fulfill transaction related and balance related audit objectives. They will also use “tests of details of balance” (Arens, etal., 2010) that will test for misstatements. At Smackey, the auditors would want to concentrate on the accuracy of accounts receivable since this is the collateral they wish to put up for the bank loan. They would also need to concentrate on the tests of details for accounts receivable as it appears that misstatements are likely as the receivables are adding up/increasing and Sarah is unwilling to write any of them off.
IV: “Complete the audit and issue an audit report (Arens, etal., 2010). Once the auditor completes phases I-III, they would compile all the information to complete their report and issue an opinion.
Describe Keller CPAs’ responsibilities related to communications regarding internal control matters. What...
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