Keystone Computer’s & Networks, Inc.
January 16, 2012
In preparing for the audit all aspects of a company need to be reviewed. For the preparation of the audit several things must be considered as define in the following pages. The primary focus of the audit is to determine the economic status as well as determine the operational performance of a company.
I. Analysis of Audit Strategy
A. Objectives of the Engagement
1. To describe the services that are to be rendered to the client. a. The objectives are to audit KCN’s financial statements for the year ended 12/31/x5. b. Issue a letter on compliance with covenants of the client’s letter of credit agreement. B. Business and Industry Conditions
1. To describe the nature of KCN’s business and industry. a. KCN sells and services micro-computers, networking hardware and software to business customers. b. The industry is sensitive to economic conditions and very competitive, with KCN competing with companies much larger than itself. c. KCN’s long-term success depends on its ability to attract and retain qualified information technology personnel. d. The annual growth in spending for information technology products and services is expected to be 6% per year for the next three years. C. Planning Meetings
1. To indicate meetings held with client and with CPA engagement team. a. At this point, one meeting has been held with client personnel and one with the engagement team. D. Ownership And Management
1. To describe the owners and management of the company. a. KCN is privately owned by Terry Keystone, Mark Keystone, John Keystone, Keith Young, and Rita Young. b. Terry and Mark Keystone participate in Management. E. Objectives, Strategies, and Business Risks
1. To describe KCN’s business objectives, major strategies and the risks related to achieving its objectives. a. The major objective of KNC is to increase revenues by 10% and increase revenues by 12% for each of the next 3 years. Major strategies include: 1. Aggressive advertising
2. Sales to customers with higher risk profiles 3. New software development
b. The primary risks include:
1. Advertising may not create the desired results 2. Credit losses may exceed benefits of increased sales, and software development activities may not produce products. F. Measurement and Review of Financial Performance
1. Describes the methods used by management to monitor performance. a. Measures used to monitor performance include:
1. Inventory and receivables turnover
2. Aging of accounts receivable
3. Sales and Gross margins by type of Revenue
4. Net Income, and the total inventory balance. G. Procedures to Obtain an Understanding of the Client and its Environment. 1. Describes the procedures used by the auditors to obtain an understanding of client and its environment. a. The procedures used include:
1. review of information from the prior-year’s audit 2. Inquiries of management
3. reading board minutes
4. review of monthly performance reports
5. review of industry reports, review of the company’s website 6. review of articles in the Wall Street Journal. H. Audit Approach
1. To describe the overall approach to be taken on the audit. a. Consistent with the previous year's audit, the CPAs will plan to perform tests of controls to assess control risk at less than the maximum for most assertions. I. Significant Risks
1. To describe the significant risks identified by the auditors. a. Two...