Audit Case ch 6



ACCT401 – Section 101
Group Project – Appendix 6C
March 25, 2013
Rachel Barrows
Mike Fields
Maria Gomozova
Sviatlana Lizun
Patricia Vaz
Megan Wark

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6C-1
Summary of Audit Sections

 
Section
 
Purpose
 
Content
1
Objectives of the Engagement
 
To describe the services that are to be rendered to the client (KCN).  
The objectives include: an audit of KCN's financial statements for the year ended 12/31/20X5 and to issue a letter of compliance with covenants of the client's letter of credit agreement.  
 
 
 
 
 
2
Business and Industry Conditions
 
To describe current business and industry conditions affecting KCN.  
KCN sells networking hardware and software to business customers. It has also begun developing it’s own software. It competes with other higher buying power companies such as Dell, HP, and Apple. Future industry outlook shows annual growth to be 3 percent for the next 3 years.  

 
 
 
 
 
3
Planning Meetings
 
To discuss when planning meetings for the audit of the current year-end will take place.  
On July 20th, auditors met with KCN controller, Loren Steele, and president, Sam Best to plan audit for year-end. On August 2nd, a planning meeting was held for all engagement team members.  
 
 
 
 
 
4
Ownership and Management
 
To describe the ownership and management of KCN
 
KCN is a private company with 5 owners/stockholders; Terry Keystone, Mark Keystone, John Keystone, Keith Young, and Rita Young. Terry and Mark are active on the Board. None of the other owners take part in any form of management  

 
 
 
 
 
5
Objectives, Strategies, and Business Risks
 
Outlines KCN’s objectives, strategies, and potential business risks.  
Objectives are to raise sales 6% and net income 8% for the next 3 years; Strategies are to incorporate aggressive marketing, offer credit to higher risk customers, and new software development; Business risks include the U.S. economy, competitors pricing, advertising not producing results, credit losses, and R+D not producing results. 6

Measurement and Review Financial Performance
 
Outlines the measures that KCN management uses to monitor company performance  
Measures of financial performance used by management include: inventories and receivables turnover, aging of A/R, sales and gross margins by type of revenue, net income, and total inventory balance  

 
 
 
 
 
7
Procedures to Obtain an Understanding of the Client and Its Environment  
To list the various steps that can be taken for the audit team to become familiar with its client.  
The audit team can become familiar with it's client (KCN) by reviewing the company website, read Wall Street Journal articles about KCN, look up industry reports, review board meetings, inquiries of management and also can rollforward some of the information from the prior year's audit.  

 
 
 
 
 
8
Significant Risks
 
To identify KCN's significant risks based on the company's information and environment.  
After obtaining an understanding of KCN's and its environment, two significant risks were identified. These risks included: KCN selling products to customers with a higher credit risk and the officers of KCN receiving significant bonuses based on quarterly results.  

 
 
 
 
 
9
Significant Accounting and Auditing Matters
 
To describe the accounting and auditing matters that KCN encounters.  
Some significant accounting and auditing matters that KCN encounters include: whether or not their extended warranties for computers, and capitalizing costs of development comply with certain requirements of FASB. Also KCN faces a possible impairment in value of some of their software.  

 
 
 
 
 
10
Planning Materiality
 
To determine a basis for planning KCN's estimations for materiality.  
The most appropriate basis for KCN's materiality would be...