ACC 410
Auditing
Keystone Computer’s & Networks, Inc.
Jacob Burdick
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
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The officers of the company receive significant bonuses based on quarterly results. J. Significant Accounting and Auditing Matters
1. To describe particular accounting and auditing matters of concern. a. Two particular concerns exist: 1. proper accounting for extended warranties 2. capitalization of software costs. K. Planning Materiality
1. To identify an amount to be used as a measure for planning materiality. a. Based on an analysis of sales, total assets, and pretax net income, an amount of $70,000 will be used as a measure of planning materiality. L. Scheduling and Staffing Plan 1. To provide the schedule for major portions of the audit, and the staffing requirements for the engagement. a. The section includes major dates beginning with interim audit work through the issuance of an updated management letter. A total of 118 hours are budgeted for the audit.
II. KCN Risk
A. KNC has engaged in a strategy to sell to customers with higher credit risk. 1. The implication of this factor is there may be an increased risk of misstatement of bad debt expense and the allowance for bad debts. The auditors may decide to assign a more experienced auditor to this audit area. In addition, the auditors will decide to increase the evidence related to the adequacy of the
Material misstatement shall be treated and assessed by the auditors as significant risks. And the auditor shall gather an understanding of the entity’s
Moreover, the auditor should preform test for effectiveness of internal controls. He may interview management by asking questions on the process of the transactions and operational activities. He may discuss with management the process of some transactions from beginning to end and then test it by using sample testing. Also he/she should make sure that there is proper control of activities; policies and procedures for adequate segregation of duties are met.
a) Providing a record of actual work performed, which provides assurance that the auditor accomplishes the planned objectives.
Properly prepared audit documentation should provide 1) a basis for planning the audit, 2) a record of evidence collected and results of tests performed on the evidence, 3) a basis for determining the appropriate audit report and 4) a basis for review by supervisors of the work performed. Achievement of these four purposes aids the auditor in providing reasonable assurance that the audit was conducted in accordance with the auditing standards.
| Implication: Increased risk of misstatement of bad debt expense and allowance for bad debts. Response: Assign more experienced auditors to this area. Increase evidence.
Audited the financial statements and evaluated taxes for some of the biggest clients according to statutory and regulatory requirements and posted on clients’ websites. Recommended measures to track KPIs and aligned financial activities with the regulations of GAAP.
The auditor must obtain an understanding of the entity and its environment, including internal controls, so that they can identify and assess the risks of material misstatement on financial statements due to fraud or error and design and perform further audit procedures.
To accomplish the audit scope, a two day field audit was conducted with staff members from Finance, QA, and SI Divisions. The field audits were conducted on January 22, 2016 and February 02, 2016. There were three teams formed to help conduct this audit. Each team consisted of one member each from the Finance, QA, and SI Divisions.
Support: The Company’s revenues increased considerably (19%). However, the Accounts receivables also increased significantly (38%). Increase in revenues are generally associated with a proportional increase in the allowance for doubtful debts. By not reporting a significant ‘allowable for bad debt accounts’, the company is able to overstate its profits and could be a cause for concern in the long run, if the receivables turn out to be bad.
This frequently puts the auditor in the position, in effect, of deciding whether a company is able to obtain the funds it needs to continue operating. Thus, the auditor’s qualification tends to be a self-fulfilling prophecy. The auditor’s expression of uncertainty about the company’s ability to continue may contribute to making it a certainty.
This part of the audit case illustrates the manner in which the auditors design substantive tests of balances. The substantive tests are illustrated for two accounts—receivables and revenue. This aspect of the audit is illustrated with the following audit documentation: • ABC’s risk assessment working paper that combines the auditors’ assessments of inherent and control risks into an overall risk of material misstatement for the assertions. • The substantive audit program of accounts receivable and revenue. • The audit sampling plan for the confirmation of accounts receivable.
Since our company is preparing for an upcoming government contract bid, management has decided that a full Financial Status Review (FSR) prior to the release of the bid is essential. This report is to provide supporting information prior to the bid in order to evaluate if any irregularities with regard to fraud and/or abuse of the company have taken place and if so, to what effect. The report is divided into four sections, which will cover information on the effect of potential occupational fraud and abuse on the company. It will also discuss U.S. government oversight of accounting fraud and abuse and its effect on
The purpose and responsibility of an audit is to provide reasonable assurance that the financial statements are free from material misstatements whether due to fraud or error. The audit will follow the authoritative guidance provided by the PCAOB and AICPA auditing standards. In relation to Johnson & Johnson Company, it would be a plus if the auditor had experience with the Consumer, Pharmaceutical and Medical Devices, but not necessary since a firm would be able to hire an expert to consult on the audit. The test will cover risk assessment procedures, tests of controls and substantive procedures.
- The nature, timing, and extent of the audit procedures to perform to reduce the risk of material misstatements to an appropriate level,