Smackey Dog Food

Thea, nice work on the paper You answered nigh every question competently and thoroughly. The only question you might have done better onis Q10 for more detail on the rules that apply.. Thank you Worksheet for You Decide Name Thea Zental____ Course Code AC 555_____ mark off ___Date 02/19/2012 Questions Q1 dispute how the SEC has influence (if any) over the visit of Smackey get across provenders, Inc. solving The SEC (Securities and permutation Commission) has a great influence on the audit of Smackey Dog Foods, Inc. , which is conducted by Keller CPAs. When auditing a publicly held company, attendants requirement to observe principles.The ethical principles of the Ameri finish Institute of Certified Public Accountants (AICPA) Code of Professional Conduct argon independence, responsibilities, the public side disceptation, integrity, objectivity and independence, due c are, and scope and nature of services. More specifically, audit police squad members are necessitate to b e nonsubjective and independent with regard to the audit by maintaining objectivity and being free of conflicts of inte bide in discharging professional responsibilities and by being independent in fact and appearance when providing auditing and break open certification services.Through this one can see how influential the SEC is. Under the Sarbanes-Oxley Act of 2002, auditors have to be objective and independent otherwise statutory sanctions can be incurred. Even though the above mentioned standards are obligate for audits of public companies, they can also be applied to the audit of a non public company want Smackey Dog Foods, Inc. Q2 Discuss the essential activities involved in the initial planning of an audit. How do these all specifically to the Smackey Dog Food invitee? Solution First the audit group up needs to understand the clients lineage and labor.It can be profitable for the audit firm to have experience in having audited other food manufacturer in preparing and performing the audit for Smackey. So far, members of the Audit team, the audit handler Pete and two audit staffers Ben and Maureen, have to understand the clients tune and industry. The next step would be to esteem the clients business risk. Business risk is the risk that measures by how overmuch a company (here Smackey) impart fail to progress to its objectives. In this activity, the audit team prisees the risk of material misstatements arising from Smackeys business risk.For example, the high wastage in Smackeys surpass Dog division presents a lot of business risk, and thence material misstatement risk. Following, the audit team will perform preliminary analytical procedures. Keller CPAs needs to oppose the performance of Smackeys with the industry (these are other competitors) to further support its initial assessment of business risk. These analytical procedures jock the audit team indentify areas where the risks of misstatement are very high. Next, Keller CPAs se t corporality and assess grateful audit risk and inherent risk.The Smackey audit team now has to set the acceptable aim of materiality. The circumstances of Smackey have to be taken into account in setting materiality level as this level is purely a relative and subject to auditors judgment. Then, the audit team is able to develop an overall audit plan and audit program. 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 depict and opinion. Q3Discuss the 4 stages of the audit and the major activities performed by the auditor in severally 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. Solution phase angle 1 Planning and Risk assessment During the planning stage the audit team will need to gain an understanding of the Smackey Dog Fo ods business and industry. More specifically, the design and implementation of the clients internal control procedures, processes and systems are studied and analyzed for the audit team to be able to assess the control risk for each f the act-related audit objective occurrence, completeness, accuracy, classification, timing and posting and summarization. After this they can assess the risk. The first risk they may want to look at is the control risk by taking a look at how the internal controls system works at Smackey Dog Foods. Stage 2 Test of internal controls By testing the effectiveness of the internal controls the auditor can mildew the control risk that lies within the company.The audit team can perform tests of controls by making inquiries of divert client personnel, examining documents, scripts, and reports maintained by Smackey, observing control-related activities such as the one done for the scroll procedures for returned Best Boy Gourmet get across food, and re-p erform the client procedures. Stage 3 Substantive tests of Transactions The Smackey audit team needs to perform substantive tests on the sense of balances of the accounts receivables and descent accounts. Moreover, substantive tests can be done finished performing substantive tests of transactions, analytical procedures and test of details of balances.By running tests of transactions, which is similar to test of internal controls the auditor will take an invoice but this fourth dimension verifying the monetary fare of the transaction. Stage 4 Audit Completion At this stage, the audit team compiles a report to Smackeys guidance as regards matters that came to the teams attention during the audit, evaluates and reviews the audit evidence obtained in the audit, and considers the audit opinion to be slewd base on the evidence obtained Q4Describe Keller CPAs responsibilities related to communications regarding internal control matters.What internal controls issues do you commi t? Solution According to auditing standards and professional conduct the auditor is required that the auditor relay information, in writing, to management and those charged with governance, significant deficiencies and material weaknesses identified in an audit. The following internal control issues were found as regards the audit for Smackey Dog Food, Inc. and thus have to be communicated to appropriate muckle within Smackey 1. Granting of commissions to sales people ground on estimated sales.This internal control issue presents risks as regards the companys financial resources as sales people might be paid for sales not made, and there is no reward process for commissions paid for this type of sale. 2. Segregation of duties as regards the discussion of inventory. With only one person depute with the preparation and approving all inventory records, the changes of material misstatements are high. 3. Lack of control procedures and guidelines in handling returned dog foods which presented opportunities wherein employees take home returned items.Lack of control procedures and guidelines in handling and recording accounts receivable. This is much more fundamental now since a major client which represents 31 % of total sales is experience financial difficulty. Moreover, the exigency of these procedures and guidelines is in light of the magnitude of receivables (29 % of total assets). Q5You shape that you will address Smackey Dog Food, Inc. s accounts receivables with confirmations. Discuss the various types of confirmations and what forms you will implement and why. SolutionWhen auditing there are two types of accounts receivable confirmation, which are positive and negative confirmations. Positive Confirmation Is a request by the debtor to confirm whether the balance as stated on the request is correct or incorrect. Two types of positive confirmation are blank confirmation form and invoice confirmation. Blank Confirmation Form Does not state the essen ce of the confirmation but requests to either fill the balance in or furnish more information. nib Confirmation This is where instead of an entire account balance being confirmed a single transaction is confirmed.Negative Confirmation This is when there is a disagreement on the stated balance In relation to Smackey dog foods I would implement an Invoice confirmation based on the info given it seems to be a good place to start substantiating balances would to be directly linked to the invoices. Taking into mind the amount of returns and how they would directly affect the invoice that was paid but then returned also means that any bullion that was made on that invoice has also been returned. Q6What are the major factors affecting sample size for confirming accounts receivable? SolutionFactors affecting the sample size for confirming accounts receivable are as follows fair to middling accounts receivable and financial statement misstatement Inherent risk, which is dependent on the size of total accounts receivable, the number of accounts, prior-year results, and evaluate misstatements Control risk Achieved detection risk based on other substantive tests and Type of confirmation. broadly a positive confirmation requires a smaller number of sample sizes. Q7A major issue in verifying the ending balance in property, plant and equipment is the possibility of legal encumbrances.Discuss what specific fright do you have. Describe the procedures your firm will perform to obtain evidence about animate legal encumbrances. Solution Here are the procedures that Keller CPAs will need to perform to obtain evidence about populateing legal encumbrances include 1. Inquiry with property, plant and equipment custodians 2. Review of minutes of meetings 3. Review of items noted during property, plant and equipment inventory observations 4. Confirmation of the clients liabilities 5. Reading and reviewing lease agreements 6.Reading and reviewing property, plant and equipment p urchase contracts and agreements The above procedures aim to assess whether encumbrances and liens to the property, plant and equipment have been identified and whether property currently pledged as collateral on a loan has not been sold or damaged. Q8The client wants to know if you will be present at the year-end inventory. What is your decision and why? What role or actions will you take at the inventory if you decide to attend the inventory. Why? Solution I think it is very important for the audit team to be at the year-end inventory.The reason for this being is that way the audit team can see how Smackey Dog food performs an inventory check. Secondly, they can take part in the inventory themselves by observation, as surface as physical checking and counting of the inventory. After deciding to attend I would ask for a assume of the inventory check list and also ask for the ability to check the inventory along with the rest of the team. By gaining a hands on check this will allo w the auditors to see if the controls over inventory are working and that the inventory check lists is correct and states all the inventory that Smackey Dog foods has.Q9Considering the general sise functions that make up the inventory and warehousing rhythm for Smackey Dog Foods, Inc. , identify the related documents and/or records that would be used. From your analysis of the internal controls related to the inventory and warehousing cycle of Smackey Dog Foods, Inc. , what internal control weaknesses exist? Solution The six general functions that make up the clients inventory and warehousing cycle are 1. Processing of purchase orders purchase sequestrations, quotations from suppliers, and purchase orders 2. Receipt of purchased materials receiving report 3.Storage of materials or inventory materials requisition form 4. Processing raw materials job cost sheet, process cost sheets 5. Storage of finished goods sales invoice, sales order form. 6. Shipping finished goods shippin g form and invoices. The internal control weaknesses that exist based on the six functions that make up the warehousing cycle as stated earlier the wishing of procedure set for handling the large amount of returned dog food. There is also nothing stating that they record the transaction when the dog food is returned so that could also mean they never took the profit off the books.The other weakness is separation of duties in the warehouse Kim alone has control over inventory, production and shipping. That is too much for one person to handle especially when her attention has been taken by one specific line of food that the company produces. Smackey needs to bring in people to a great extent to help Kim and reduce her workload. By doing this it will also lower the risk that inventory, production or shipping could start misstated. Q10Discuss if Keller CPAs or its auditors are breaching any Professional directs of Conduct and why or why not?Solution Several things occurred that make me believe yes the Keller CPAs are breaching some of the rules of conduct. One issue that sticks out immediately is Pete and Allens relationship. Pete and Allen have actually discussed the audit over a few beers which should not have occurred. This creates a conflict of interest and independence. Another problem that Keller CPAs are faced with is the lack of knowledge of the industry top with taking on the audit in a crunched period frame to complete it in.By doing this the possibly of the audit team gaining enough knowledge of the industry to perform an audit up to standards in the small time frame is going to be a task in itself. If the audit team had a big time frame this would be ok but in such a small time frame they wont be able to spend that much time learning the industry and this could lead to not being able to perform an audit following all audit standards. Q11Discuss the CPA firms legal indebtedness concerns for this audit if they make a material unwilled or learne d mistake. Include any other legal liability concerns regarding possible Professional Rule violations.Solution The CPA firm could face some serious legal consequences if they make an unintentional or intentional mistake. The main liabilities that I see between the audit team and the Smackey Dog Food audit itself is liability to clients, and liability to third parties. Liability to clients In this case this would be where if the auditors missed any fraud occurring and therefore the client can turn around and sue the Keller audit team. In terms of Smackey Dog Food directly, one area of possible fraud is in the inventory department and the returned inventory area.With the lack of separate of duties and the fact that two employees essentially run the whole inventory department it might not level(p) be intentional fraud it maybe just a misstatement and lack of controls over inventory that caused it. exclusively the auditor needs to discover this to avoid any legal action. Liability to third parties This occurs if the Keller auditor team fails to find any material misstatements on the financial statements and then the bank would loans Smackey funds, but shortly by and by Smackey goes bankrupt. This would open up the auditor to be able to be sued by the bank for not contractable the misstatements on the financials.