Auditing of Smackey Dog Foods, Inc - Term Paper Example

? Auditing Question Discuss How The SEC Has Influence (If Any) Over The Audit of Smackey Dog Foods, Inc. U.S. Securities and Exchange Commission (SEC) has an influence in setting the GAAP principles, i.e. ‘Generally Accepted Accounting Principles’ and thus can have a substantial impact over the auditing process to be taken into consideration while reviewing the financial disclosures of Smackey Dog Foods, Inc. From an overall point of view, it plays a vital role in assisting the auditing process involving the financial statements of Smackey Dog Foods, Inc by specifying and reporting requirements necessary for the fair disclosure of accounting. Hence, SEC can assist Smackey Dog Foods, Inc by maintaining orderly, fair & efficient markets and also help in the process of capital formation. SEC can also help Smackey Dog Foods, Inc plan its future expansion and growth strategies ensuring sufficient return to the investors and stakeholders as well. In addition, SEC assists the investors in decision-making and the auditors by generating awareness regarding the various legal treatments to be noted while executing the auditing process to ensure a just accounting disclosure which can have certain direct implications on the audit in Smackey Dog Foods, Inc. (US Securities and Exchange Commission, 2011). Question 2: Discuss The Essential Activities Involved In The Initial Planning of An Audit. How Do These All Specifically To the Smackey Dog Food Client? The essential activities involved in the initial planning of an audit entail certain steps. The first step is the deciding part where the auditor decides whether to serve the new client. Notably, considering the fact that this decision should be taken at an early stage before any significant cost is incurred, Keller CPA will focus on the current situation faced by Smackey Dog Foods Inc. Identification of the need of audit in any organization is also a part of initial planning. To avoid misunderstanding, the audit engagement process will be discussed with the client. With this regards, Keller CPA had sent his staffers, Ben and Maureen, to Smackey Dog Foods Inc. for the audit engagement. The auditor requires independence to perform his work taking into account that there should be no management integrity issues in the organization (American Institute of CPAs, 2012). Question 3: 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 four stages of the audit are Preliminary review, Audit Report, Fieldwork, and Planning. In the planning phase the research and data gathering is done for the audit process. The research and data may contain the prior audit files, board policies, financial reports, administrative regulations, shared audit programs, internet sites and job descriptions among others. A meeting is fixed to introduce what may occur in the audit, the internal auditor meets the desired person from the department to identify the issues, and special areas of concern. Preliminary Review: In the preliminary review the existing control composition will be assessed and evaluated to make the necessary variations in the audit scope draft, program, and questionnaires. Keller CPA will also review the internal control formation of the department by using different kinds of tools and methods to gather and evaluate data about the operation. This will help to ensure about the areas of high risk and to design a program to work in the fieldwork stage. Fieldwork: In this phase auditor will perform transactions and logical reviews, and further relevant information required for the audit. The internal controls of Smackey Dog Foods Inc. are to be recognized during the preliminary review which is being operated and is being determined by Keller CPA. The audit program is to be reviewed to ensure that procedures described within are appropriate to meet the audit objectives. The timeline of the audit depends on the objectives, and the accessibility of the information. Surveys, advice & informal communication are the process of fieldwork. Audit Report: The final output will contain the audit report, in which audit findings, suggestion, and requisite information with suggestion will be presented by Keller CPA. Next, the fieldwork is completed and the internal auditor will sketch a report and then forward it to the department administration of Smackey Dog Foods Inc. for the review & discussion (Laredo Independent School District, n.d). Question 4: Describe Keller CPAs’ Responsibilities Related To Communications Regarding Internal Control Matters. What Internal Controls Issues Do You Identify? With regards to the Keller CPA’s responsibilities related to communications regarding internal control matters of Smackey Dog Foods, Inc., it should be mentioned that according to international standard on auditing 260, two way communications are effective. Communication should be clear with those charged with governance and in relation to the execution of financial report audit, and timing of audit. The recorded transactions should be complete and it should contain all the required files, correctly summarized. The auditor has to communicate that the transaction should be recorded timely. The process of communication while auditing can also be in the written format (International Federation of Accountants, 2011). Question 5: You Decide That You Will Address Smackey Dog Foods, Inc.’s Accounts Receivables through Confirmations. Discuss The Various Types of Confirmations and What Forms You Will Implement and Why. There are generally two types of confirmations taken into consideration while auditing the accounts receivable. These are Positive Confirmation & Negative Confirmation. Positive confirmation is a written or oral response from a third party if the balance is correct. Similarly, Negative confirmation is a written or oral response from a third party only if the balance is incorrect. It is worth mentioning that positive form of receivables confirmation is preferred when the internal control relating to accounts receivable is considered to be effective, and when numerous small balances are involved. I will implement a positive confirmation type of ‘account receivable’ confirmation because there are many small balances involved in Smackey Dog Foods Inc (Fortune City, n.d.; Jacksonville State University, n.d.). Question 6: What Are The Major Factors Affecting Sample Size For Confirming Accounts Receivable? The main factors influencing the sample size for proving accounts receivable are number of accounts receivable, types of evidences, the kind of confirmations, the tests of debits and credits to individual customers, misstatement, and size of total accounts receivable. Accounts receivable illustrates an important balance on the ‘financial statement’ which makes the confirmation highly reliable. Trial balance is mostly used for checking the accuracy of accounts receivable (Lawrence & Klimberg, 2006). Question 7: A Major Issue In Verifying The Ending Balance In Property, Plant And Equipment Is The Possibility of Legal Encumbrances. Discuss What Specific Concern You Have. Describe The Procedures Your Firm Will Perform To Obtain Evidence About Existing Legal Encumbrances. There can be a major issues and possibilities with regards to legal encumbrances in verifying the ending balance in properties owing to plants and equipments. The client, i.e. Smackey Dog Foods Inc., might make mistakes, for instance, capitalizing the expenses such as rent repairs in its accounting books. Furthermore, it has often been noted that clients tend to document a few transactions in supplies, repairs and maintenance, and other accounts, which should be recorded as assets. To obtain evidences about obtainable officially permitted encumbrances, the firm will reconcile accounts payable & purchasing modules to a General Ledger. The ‘journal balances and sub-ledger to ledger’ links should be correct in this context. The detailed summary of audit results will be required where the problem arises and the required resolution can be done. The analysis of GL Operating parameters, PO Operating parameters, and AP Operating parameters can be done to obtain evidences about existing legal encumbrances (Montage Integration US, Inc, 2001). Question 8: The 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? Yes, I will be present at the end of the year inventory verification as I believe that being the auditor of Smackey Dog Foods Inc. I must know what is going on and how much stock of finished goods is being maintained at the year end. In the month of January, fieldwork has been performed by the two audit staffers Ben and Maureen. I must make sure that data in Smackey Dog Foods Inc’s computer system is accurately maintained and reliable and I will personally count all inventories, integrating computer data with the physical counts. In addition, I will re-assess the cutoff analysis examining the procedures for halting any further receiving into the storehouse at the time of physical inventory count. I will also test the high value items, inventory in transit as well as review freight cost, item cost, error-prone items, inventory allowances, overhead analysis, direct labor analysis, and work in progress (Vonal, 2011). Question 9: Considering The General Six Functions That Make Up The Inventory And Warehousing Cycle 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? Considering the general function that contribute to the inventory and warehousing cycle, a cost effective system should be introduced in Smackey Dog Foods Inc, as it is being observed by Ben and Maureen that the dog foodstuff bags have been heaped and they were marked as returned. Additionally, an employee of Smackey Dog Foods Inc was observed throwing away bags of premium Best Boy Gourmet dog food into the dumpster which indicates to the fact that there has been a bunch of wastage incurred in the organization. From the analysis of the internal controls related to the inventory and warehousing cycle of Smackey Dogs Foods, Inc., the internal control weaknesses that exits are improper waste management and inefficient inventory control. Question 10: Discuss If Keller CPAs Or Its Auditors Are Breaching Any Professional Rules of Conduct and Why Or Why Not? No, the Keller CPAs or its auditors are not violating any professional rules of conduct directly. However, Pete has conveyed information about the audit with Alan, not knowing the fact that Alan was married to Kim, a co-founder of Smackey Dog Foods Inc. It is worth mentioning that auditors should restrict themselves from conveying any auditing information to a third person. Hence, Pete has breached the professional rule of conduct, but unknowingly. Therefore, it can be stated that a breach of professional rule of conduct has been committed by Pete indirectly. Question 11: Discuss The CPA Firm’s Legal Liability Concerns for This Audit If They Make a Material Unintentional or Intentional Mistake. Include Any Other Legal Liability Concerns Regarding Possible Professional Rule Violations. The CPA firm’s legal liability concerns for this audit provide assurance to a firm. They are expected to uphold the principles as integrity, objectivity, competency, and confidentiality. Thus, an auditor is responsible for measuring the aspects of individuals, projects, and businesses. They are often expected to make recommendation for improving the negative condition of the organization (El-Moukammal, 2009). Thus, these are the legal liability concerns regarding possible professional rule violations for this audit. References American Institute of CPAs. (2012). Planning and supervision. Retrieved from http://www.aicpa.org/Research/Standards/AuditAttest/DownloadableDocuments/AU-00311.pdf EL-Moukammal, H. (2009). Auditors’ code of Ethics. Retrieved from http://www.lacpa.org.lb/Includes/Images/Docs/TC/TC404.pdf Fortune City. (n.d.). Auditing: Chapters 15 – 21. Retrieved from http://members.fortunecity.com/tgunner640/uic/aren-c15-21.htm International Federation of Accountants. (2011). The role of communication. Retrieved from http://www.ifac.org/sites/default/files/downloads/a014-2010-iaasb-handbook-isa-260.pdf Jacksonville State University. (n.d.). Audit planning and analytical procedures. Retrieved from http://www.google.co.in/url?sa=t&rct=j&q=audit%20planning%20and%20analytical%20procedures%20%2B%20ppt&source=web&cd=5&ved=0CEQQFjAE&url=http%3A%2F%2Fccba.jsu.edu%2Fccba%2Ffaculty%2FfacultyFiles%2Fjzanzig_Auditing%2520Ch%25207%2520Lecture.ppt&ei=l-IwT9zlAofJrQe3x9ysBA&usg=AFQjCNF0wNSmXwbwXTjEr6A1ZOrZEPq0NA&sig2=nMH6C5pLgA1HjbU5x33AVA Laredo Independent School District. (n.d.). Preliminary review. Retrieved from http://www.laredoisd.org/departments/internalauditor/pdf/IA_Audit_Process_LISD.pdf Lawrence, K. D., & Klimberg, R. K. (2006). Applications of management science: in productivity, finance, and operations. UK: Emerald Group Publishing. Montage Integration US. Inc. (2001). Encumbrance accounting solution “A to Z” Retrieved from http://www.govtsig.org/ENCUMBRANCE%20SOLUTION.pdf U.S Securities and Exchange Commission. (2011). About SEC. Retrieved from http://www.sec.gov/about/whatwedo.shtml Vonal, L. W. (2011). The fraud audit. US: John Wiley & Sons. Read More