YouSmackey Dog Food, Inc.
ACCT555 External Auditing
April 20, 2013
Smackey Dog Food
Like many companies, Smackey Dog Foods is a privately own company that has started out by three sisters in their own homes, and has grown much faster than they anticipated, and are quickly realizing that they need to expand because of their success for the past few years. Due to their business success and expansion, the company is experiencing many issues surrounding their management styles and accounting techniques. These issues are a result of their inexperience in accounting and management, and lack of knowledge of the proper internal control aspects of running a business. There are rules and standards that exist that the company must adhere to, but as we see the sisters may not be aware of them because of the many issues they are experiencing with their internal controls, and also ensuring that their accounting is adhering to the standards that are required of them. By hiring Keller CPA firm to perform their audit, the auditors will reveal the many issues that the company is currently facing and will need to improve upon. Q1: Discuss how the SEC has influence (if any) over the audit of Smackey Dog Foods, Inc. Even though Smackey Dog Foods, Inc. is not a publicly traded company the SEC has a significant influence over the company’s audit. Keller CPAs will still need to follow the auditing standards put in place by the SEC during the auditing process. AICPA principles must be followed that is ensuring that the Keller CPAs are independent of Smackey Dog Foods, Inc., free of conflicts of interest when performing their professional responsibilities, has the public interest, perform with integrity, objectivity and independence, due care, and scope and nature of services. Q2: Discuss the essential activities involved in the initial planning of an audit. How do these all specifically relates to the Smackey Dog Food client? 1. Understand the client’s business and industry. Keller CPAs can use its experience from auditing other manufacturing companies in the audit of Smackey Dog Foods, Inc. The essential part of this step is for the audit team to learn and understand as much as possible of the client’s business and industry. All related parties will be identified in this stage of the planning as well. 2. Assess client business risk. The business risk involved is that Smackey will fail to achieve its objectives. The audit team will assess the risk of material misstatements arising from Smackey’s business risk. 3. Perform preliminary analytical procedures. The function of the auditors here will be to compare the performance of the client to that of the industry, which will help support the assessment of the clients’ business risk, and to identify areas that are more susceptible to misstatements. 4. Set materiality and assess acceptable audit risk and inherent risk. At this stage, the audit team will have to determine what will be the acceptable level of materiality. Based on a percentage of net assets, the team will then allocate this amount to segments of the audit. All circumstances of the client will be taken into consideration as materiality is subject to the auditor’s judgment. 5. Develop overall audit plan and audit programs. The audit plan and program aims to achieve the audit risk objectives of the audit team and to provide reasonable assurance and basis for the audit report and opinion. Q3: 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. The 4 stages of the audit and the major activities performed by the auditor, with an example, which applies to Smackey Dog Food, are: 1. Planning and risk assessment. An understanding of...
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