Smackey Dog Foods, Inc is a new client to Keller CPAs firm. The nature of business for this company is to produce natural dog food. Keller has never had any experience in the audit on this industry before. Smackey Dog Foods started in a family kitchen, experienced explosive growth, and have had some troubles handling the accounting side of the business. The auditor identifies that main purpose of Smackey Dog Food to obtain an audit report is to fulfill the bank requirement of additional loan for $150,000 on top of the company’s current existing bank loan for $150,000.
Under audit planning, the auditor decides whether to accept a new client or continue serving an existing one. This determination is typically made by an experienced auditor who is in a position to make an important decision. The auditor wants to make this decision early, before incurring any significant costs that cannot be recovered. With Smackey Dog Food, the first thing to address is the SEC’s role or influence over company. Since Smackey is privately owned there is not a direct oversight or reporting role for the SEC.
There are many audit risks including non-experience in client's industry, which Keller CPAs shouldn't accept the engagement. However, Keller has had time to devote to the audit and therefore accepted the job. Under engagement staffing required audit specialist, Keller CPAs set an Audit team that have Pete as the audit manager with two audit staffs Ben and Maureen to visit the client, assess the situation, and plan the audit.
According to information we’ve obtained from understanding of company background and during audit field work we identified some issue and company control risk related to the follow areas: * Segregation of Duties
* Lack of Internal Control
- Lack of control on main production for the company.
- Lack of control in accounting records procedure
- Lack of control in handling and recording accounts receivable * Issue on abilities of Collection
* Problem on Sales Projection and Sales commission payout * Abilities of debt payment
* Inventory Management,
* Waste and stolen issue
* Potential liability contingency on pending lawsuit
Segregation of Duties
The auditor notices in that Henry, who is Kim's (production operations manager) assistant, is the only person who is assigned and responds the handing of inventory. Henry is personally involved in both preparation and approves all inventory record. To protect from embezzlement, the company should not allow a person who has temporary or permanent custody of assets account for those assets. Allowing him to perform both functions, Henry, has a high chance to disposing of the inventory for his personal gain and adjusting the record to cover up the theft easily. Therefore, the chances of material misstatements are also high. Lack of Internal Control
First of all, there is lack of control on main production for the company. Smackey Dog Foods is where they generate profit and is also the brand that makes the company famous and successful. It was under control of Henry who is the person that has multifunction in inventory and the same person that monitors the production and shipment of Smackey Dog Food. Production operations manager, Kim, wasn't pay attention and overseeing this production line by herself. She would rather spend most of her time managing and taking care of a new boutique division named Best Boy Gourmet production line. These situations put the company at risk because its main business production line is run by incapable personnel.
The second issue that we discovered is lack of control in accounting records procedure especially for the returned bags. Although Henry mentions that inventory system is using first in first out method, there is no any proper procedure or record of returned bags, which would help identify when bags go missing. The shipping docks always seems to be full of...