Q1: Discuss how the SEC has influence ( if any ) over the audit of Smackey Dog Foods. Inc. Solution:
The SEC aids in supplying investors with dependable information upon which to do investing determination. The Securities Act of 1933 requires most companies be aftering to publish new securities to the populace to subject a enrollment statement to the SEC for blessing. The Securities Exchange Act of 1934 provides extra protection by necessitating public companies and others to register elaborate one-year studies with the committee. Smackey Dog Food. demand to register following signifiers: Form S-1. “S” signifiers apply to the Securities Act of 1933 and must be completed and registered with the SEC when a company plans to publish new securities to the populace. The S-1 signifier is the general signifier used when there is no specifically prescribed signifier. Form 10-Q. This study must be filed quarterly for all publically held companies. It contains certain fiscal information and requires timely auditor reappraisals of the fiscal statements before registering with the committee. Q2: Discuss the indispensable activities involved in the initial planning of an audit. How make these all specifically to the Smackey Dog Food client? Solution:
Audit Planning consist of the followers:
1. The hearer decides whether to accept a new client or go on functioning an bing one. This finding is typically made by an experient hearer who is in a place to do a of import determinations. The hearer wants to do this determination early. before incurring any important cost that can non be recovered. With Smackey Dog Food. Keller CPA had clip to give to the audit and hence accepted the occupation. 2. The hearer identifies why the client wants or needs an audit. This information is likely to impact the staying parts of the planning procedure.
3. To avoid misinterpretations. the hearer obtains an apprehension with the client about the footings of the battle. With Smackey Dog Food. the hearers sent over the audit staff members to measure the client and program the audit. 4. The hearer develops an overall scheme for the audit. including engagement staffing and any needed audit specializer. Q3: Discuss the 4 phases of the audit and the major activities performed by the hearer in each stage. Give an illustration of how each of these specifically applies to the Smackey Dog Food. Inc audit. For case. analyze the evident internal control failings and possible negative result of each. Solution:
Plan and Design an Audit Approach ( Phase I )
For any given audit. there are many ways in which an hearer can roll up grounds to run into the overall audit aim of supplying an sentiment on the fiscal statements. Two paramount considerations affect the attack the hearer selects: 1. Sufficient appropriate grounds must be accumulated to run into the auditor’s professional duty. 2. The cost of roll uping the grounds should be minimized. The first consideration is the most of import. but cost minimisation is necessary if CPA houses are to be competitory and profitable. If there were no concern for commanding costs. grounds determination devising would be easy. Hearers would maintain adding grounds. without concern for efficiency. until they were sufficiently certain that there were no material misstatements. Concern for sufficient appropriate grounds and cost control necessitates be aftering the battle.
The program should ensue in an effectual audit attack at a sensible cost. Perform Tests of Controls and Substantive Trials of Transactions ( Phase II ) Before hearers can warrant cut downing planned assessed control hazard when internal controls are believed to be effectual. they must foremost prove the effectivity of the controls. The processs for this type of proving are normally referred to as trials of controls. For illustration. presume a client’s internal controls require the confirmation by an independent clerk of all unit selling monetary values on gross revenues before gross revenues bills are mailed to clients. This control is straight related to the truth transaction-related audit aim for gross revenues. The hearer might prove the effectivity of this control by analyzing a sample of duplicate gross revenues bills for the clerk’s initials bespeaking that the unit merchandising monetary value was verified. Hearers besides evaluate the client’s recording of minutess by verifying the pecuniary sums of minutess. a procedure called substantial trials of minutess.
For illustration. the hearer might compare the unit merchandising monetary value on a extra gross revenues bill with the sanctioned monetary value list as a trial of the truth nonsubjective for gross revenues minutess. Like the trial of control in the preceding paragraph. this trial satisfies the truth transaction-related audit aim for gross revenues. For the interest of efficiency. hearers frequently perform trials of controls and substantial trials of minutess at the same clip. Perform Analytic Procedures and Trials of Details of Balances ( Phase III ) There are two general classs of stage III processs.
Analytic processs use comparings and relationships to measure whether history balances or other informations appear sensible. For illustration. to supply some confidence for the truth aim for both gross revenues minutess ( transaction-related audit aim ) and histories receivable ( balance-related audit aim ) . the hearer might analyze gross revenues minutess in the gross revenues diary for remarkably big sums and besides compare entire monthly gross revenues with anterior old ages. If a company is systematically utilizing wrong gross revenues monetary values or improperly entering gross revenues. important differences are likely. Trials of inside informations of balances are specific processs intended to prove for pecuniary misstatements in the balances in the fiscal statements Complete the Audit and Issue an Audit Report ( Phase IV )
After the hearer has completed all processs for each audit aim and for each fiscal statement history and related revelations. it is necessary to unite the information obtained to make an overall decision as to whether the fiscal statements are reasonably presented. This extremely subjective procedure relies to a great extent on the auditor’s professional judgement. When the audit is completed. the CPA must publish an audit study to attach to the client’s published fiscal statements.
Q4: Describe Keller CPAs’ duties related to communications sing internal control affairs. What internal controls issues do you place? Solution:
1. Recorded minutess exist ( happening ) .
2. Existing minutess are recorded ( completeness )
3. Recorded minutess are right included in the maestro files and are right summarized ( posting and summarisation )
4. Recorded minutess
are stated at the right sums ( truth )
5. Minutess are right classified ( categorization )
6. Minutess are recorded on the correct day of the months ( clocking )
There are several internal control issues for Smackey Dog Food: a. Lack of Internal Control
b. Segregation of Duties
c. Lack of control on chief production for the company
d. Lack of control in accounting records process
e. Lack of control in managing and entering histories receivable
Q5: You decide that you will turn to Smackey Dog Food. Inc. ’s histories receivables through verifications. Discourse the assorted types of verifications and what forms you will implement and why. Solution:
A positive verification is a communicating addressed to the debitor bespeaking the receiver to corroborate straight whether the balance as stated on the verification petition is right or wrong. A clean verification signifier is a type of positive verification that does non province the sum on the verification but requests the receiver to make full in the balance or supply other information. Because clean signifiers require the receiver to find the information requested. they are considered more dependable than verifications that include balance information. Blank signifiers are seldom used in pattern because they frequently result in lower response rates. An invoice verification is another type of positive verification in which an person bill is confirmed. instead than the customer’s full histories receivable balance. A negative verification is besides addressed to the debitor but requests a response merely when the debitor disagrees with the declared sum. In Smackey Dog Food instance I will implement positive verification. A positive verification is more dependable grounds because the hearer can execute follow-up processs if a response is non received from the debitor.
Q6: What are the major factors impacting sample size for corroborating histories receivable? Solution:
When practical and sensible. the verification of a sample of histories
receivable is required. This demand exists because A/R normally represents a important balance on the fiscal statement. and verifications are a extremely dependable type of grounds. Confirmation of histories selected from the test balance is the most common trial of inside informations of balances for the truth of histories receivable. Hearers perform trial of the debits and credits to single customer’s balances by analyzing back uping certification for cargos and hard currency grosss. Hearers will find whether receivables from related parties have been separated on the aged test balance.
Q7: A major issue in verifying the stoping balance in belongings. works and equipment is the possibility of legal burdens. Discourse what specific concern do you hold. Describe the processs your house will execute to obtain grounds about bing legal burdens. Solution:
It is common pattern to make so portion of the audit of the belongings. works and equipment histories. It is possible the client has falsely capitalized fixs. rents or similar disbursals. Clients normally include minutess that should be recorded as assets in fixs and care disbursal. rental disbursal. supplies. little tools. and similar histories. If I was to reason this type of material misstatement is likely. they may necessitate to make larger sums of debited to the disbursal histories? In add-on to executing processs to obtain grounds related to balance-related audit aims for fixed assets. hearers besides perform audit processs related to the four presentation and revelation aims for fixed assets.
A major consideration in verifying revelations related to fixed assets is the possibility of legal burdens. Hearers may utilize several methods to find whether fabricating equipment is encumbered. including: Read the footings of loan and recognition understandings ; Mail loan verification petitions to Bankss and other loaning establishments and Have treatments with the client or send letters to legal advocate. Q8: The client wants to cognize if you will be present at the year-end stock list. What is your determination and why? What function or actions will you take at the stock list if you decide to go to the stock list. Why? Solution:
I would be present at the year-end stock list because the stock list count is done by in-house forces. SAS 1 now requires hearers to fulfill themselves about the effectivity of the client’s methods of numbering stock list and the trust they can put on the client’s representation about the measures and physical status of the stock list. As an hearer. I will: Be prepared at the clip the client counts their stock list for finding year-end balances ; Observe the client’s numeration processs ; Make inquires of client forces about their numeration processs and Make my ain independent trials of the physical count I would be responsible for measuring and detecting the client’s processs. including making trial counts of the stock list and drawing decisions about the adequateness of the physical stock list. An hearer doesn’t need to a physical scrutiny if the stock list is housed in a public warehouse or overseen by outside keepers.
Q9: Sing the general six maps that make up the stock list and warehousing rhythm for Smackey Dog Foods. Inc. . place the related paperss and/or records that would be used. From your analysis of the internal controls related to the stock list and warehousing rhythm of Smackey Dog Foods. Inc. . what internal control failings exist? Solution:
An equal cost accounting system is an of import portion of the processing of goods map for all fabrication companies. The Smackey Dog Food Inc. has so much waste that they should see a occupation cost system. They should get down with acquisition of natural stuffs for production. Adequate controls over buying must be maintained whether stock list purchases are for natural stuff for a maker or finished goods for a retail merchant. Receipt of the ordered stuffs for productions its portion of the acquisition and payment rhythm. involves the review of stuff received for measure and quality. The receiving section should fix a having study that becomes a portion of the certification before payment is made. After review. the stuff is sent to the storage room and transcripts of the receiving paperss are sent to buying. the storage room and A/P.
Once received. stuffs should be stored in a stock room. If another section needs stuffs for production. forces submit a decently approved stuffs requisition. work order. or similar papers. This requisition papers is used to update the ageless stock list maestro files and record transportations from natural stuffs to work-in-process histories. These updates occur automatically in organisations with incorporate stock list direction and accounting package systems. They could see finding the finished goods points and measures they will bring forth based on specific orders from clients. gross revenues prognosiss. predetermined finished goods stock list degrees. and economical production tallies. Production section should do commissariats to account for the measures produced. control of bit. quality controls. and physical protection of stuff in procedure. There are many internal failings and to rectify them it may take replacing some persons on the direction squad. One good internal control would be for finished goods in that they are should be kept under physical control in a separate. limited-access country.
Knowledge about a client’s internal control is included in a separated by and large accepted scrutinizing criterion. The hearer must obtain a sufficient apprehension of the entity and its environment. including its internal controls. to measure the hazard of material misstatement of the fiscal statements whether due to error or fraud and to plan the nature. timing. and extent of farther audit processs. The hearer obtains the apprehension of internal control to measure control hazard in every audit. Hearers are chiefly concerned about controls over the dependability of fiscal coverage and controls over categories of minutess. Q10: Discuss if Keller CPAs or its hearers are transgressing any Professional Rules of Conduct and why or why non? Solution:
A disclaimer of sentiment must be issued if the hearer is determined to miss independency under the regulations of the Code of Professional Conduct. This rigorous demand reflects the importance of independency to hearers. In return for the religion that the public rests in them. members should seek continually to show their dedication to professional excellence. Pete was out of conformity to discourse Smackey Dog Food Inc with his friend Alan. Members have a go oning duty to collaborate with each other to better the art of accounting. keep the public’s assurance. and carry out the profession’s particular duties for self-governance. The corporate attempts of all members are required to keep and heighten the traditions of the profession. Rule # 101-No misdemeanor
Rule # 102- Yes. will ; because Pete’s ( Pete is scrutinizing director ) new best friend. Alan. was married to Smackey Dog Food. Inc. ’s proprietor. Kim. 4 old ages ago
201General standards-No misdemeanor
202Compliance with standards- No misdemeanor
203Accounting principles- No misdemeanor
301Confidential client information-Yes. misdemeanor ; because Pete has talked 302Contingent fees- No misdemeanor
501Acts discreditable- No misdemeanor
502Advertising and other signifiers of solicitation- No misdemeanor 503Commissions and referral fees- No misdemeanor
505Form of organisation and name- No misdemeanor
Q11: Discourse the CPA firm’s legal liability concerns for this audit if they make a material unwilled or knowing error. Include any other legal liability concerns sing possible Professional Rule misdemeanors.
The inclusion of the word stuff conveys that hearers are responsible merely to seek for important. non minor misstatements that do non impact users’ determinations. An audit provides a high degree of confidence. but it is non a warrant. When an audit has failed to bring out material misstatements and the incorrect type of audit sentiment is issued. it is appropriate to oppugn whether the hearer exercised due attention in executing the audit. The jurisprudence frequently allows parties who suffered losingss to retrieve some or all of the losingss caused by the audit failure. It is hard to find when the hearer has failed to utilize due attention. Legal case in point makes it hard to find who has the right to anticipate the benefit of an audit. An auditor’s failure to follow due attention frequently consequences in liability and amendss against the CPA house. Four beginnings of auditors’ legal liability consist:
1. Liability to clients
2. Liability to 3rd parties under common jurisprudence
3. Civil liability under the federal securities Torahs
4. Condemnable liability