ACC 490 Week 3 Learning Team Ch. 6 & 7 Textbook Exercises.doc

8/17/2019 ACC 490 Week 3 Learning Team Ch. 6 & 7 Textbook Exercises.doc

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Ch. 6 & 7 Textbook Exercises

Name

Comprehensive Question 6-26

(Audit progrms nd ssertions! Assume that you are responsible for developing an

audit program for a manufacturing client that sells to over 1,400 customers. You want to

ensure your audit program addresses all relevant assertions for sales and accounts

receivable. Address the following question in the contet of the audit sales and

receivables for this manufacturing client.

"e#uired

A. $ht is the purpose o% n udit progrm

An audit program !documents decision about the audit procedures that the auditor

believes are necessary to obtain reasonable assurance that the financial statements

are presented fairly in all material respects! "#oynton $ %ohnson, &00', p. &(1). *he

audit program is required and is part of generally accepted auditing standards. *he

audit program includes procedures to be performed, who performed them, and

when. *he program also includes a cross+reference to woring papers. *he woring

papers are a way for the auditor to document both their wor and any evidence

collected. ! -enerally accepted auditing standards describe woring papers as

records ept by the auditor of the procedures applied, the tests performed, theinformation obtained, and the pertinent conclusion reached in the audit! "#oynton $

%ohnson, &00', p. &(4). or eample, evidence obtained when auditing accounts

receivable might include prior year wor papers to trace beginning balances to or a

sampling of sales invoice to vouch debits to.

'. Expin )h* uditors trnste udit ssertions into speci%ic udit

ob+ectives )hen deveoping n udit progrm.

Assertions are used to !mae decisions about the assessment of ris by considering

the types of potential misstatements that may occur, and design audit proceduresthat are appropriate to the assertion and to the ris assessment! "#oynton $

%ohnson, &00', p. 1/). *he assertions, or audit obectives, provide a framewor for

auditors to follow during the audit program. *hat framewor allows the auditor !to

identify the relevant transactions, account balances, and disclosures in the financial

statements for a transaction cycle that is being audited! "#oynton $ %ohnson, &00',

p. &21). or eample, when auditing the revenue cycle, the auditor could establish


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transaction obectives such as occurrence, completeness, accuracy, cutoff, and

classification. 3hen auditing account balances, the auditor might establish

obectives such as eistence, completeness, rights and obligations, and valuation

and allocation. inally, when auditing disclosures, the auditor may establish

obectives such as occurrence, completeness, and classification. All these obectives

are actually assertions outlined in -AA.

C. ,% *ou re uditing the existence nd occurrence ssertion )ht speci%icudit ob+ectives shoud be ccompished b* deveoping n uditprogrm Expin the purpose o% ech udit ob+ective.

5pecific audit obectives that should be accomplished in auditing the eistence and

occurrence assertion when developing an audit program includes the following6

*ransaction Audit 7bective+ 7ccurrence6 All sales, receivables, and cash receipts

have been recorded during the period the transaction occurred in and revenue isrecogni8ed correctly. *ransaction Audit 7bective+ 9utoff6 All sales, receivables, and

cash receipts have been recorded in the correct period and sales revenue has not

been recogni8ed that should be in a subsequent period.

#alance Audit 7bective+ :istence6 All accounts receivables are valid amounts and

do actually eist.

. ,% *ou re uditing the vution or oction ssertion )ht speci%ic udit

ob+ectives shoud be ccompished b* deveoping n udit progrm

Expin the purpose o% ech udit ob+ective.

5pecific audit obectives that should be accomplished in auditing the valuation or

allocation assertion when developing an audit program include the following6*ransaction Audit 7bective+ Accuracy6 All sales, receivables, and cash receipts have

been accurately recorded with the correct amount.#alance 5heet 7bective+ ;aluation and Allocation6 Accounts receivable are

recorded at the net reali8able value and appropriate allowance for doubtful accounts

is recorded properly.


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Cse 7-2/ (0rt b!

(1e) Cient Acceptnce! Comprehensive Cse 3t. 4ood 5urniture ,nc.

Compn* 'ckground ,n%ormtion Your employer,


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manufacturers. Femand is steadily growing. *he company plans to epand its

mareting in this niche.

*he companyEs manufacturing and eecutive offices are located in facilities leased from

the founder, adacent to shipping and transportation facilities in the acific Northwest.

*wo adacent buildings house the corporation, with the offices located above thewarehouse. *he company purchases raw materials including coil steel, bar stoc,

hardware, laminated particleboard, casters, fabric, rubber and plastic products, and

shipping cartons. >aterials are delivered to the doc by common carriers or by

suppliersE trucs. inished products are shipped 7# from the warehouse or piced up

by the customer. >t. ?ood has a delivery truc for smaller, local orders.

*he company has 1/0 employees involved in manufacturing operations and &0 in the

eecutive offices. *he companyEs worforce is stable and highly silled. >any of the

employees have been with the company for more than 1( years. *he companyEs wor

environment and solid reputation have allowed it to attract and eep employees in atight maretplace. >t. ?ood offers both pension and profit+sharing plansD the plans have

been in place for over &( years.

*he company distributes its products through a small networ of approimately 1(0

office furniture dealers in maor G.5. cities. ost of the sales growth over

the last two years is attributed to this new distribution channelD it represented 2( percent

of year+&0B2 sales. *heir largest single customer accounts for / percent of sales. *he

company also produces a catalogue and has an information web site with an order lin.

*he office cabinetry line offers custom orders for on+site installation. 9ustomers includemaor hotels and professional and corporate offices. *oday &0 percent of sales come

from this line, and the chief operating officer would lie to see this line grow to a total of

C&( million in sales in the net three to five years. @ndividuals, which comprise about (

percent of total sales, can order directly from >t. ?ood urniture using the companyEs

web site. A large showroom is maintained at the corporate officesD customers may also

place orders at the showroom.

>t. ?ood urniture is subect to a variety of federal, state, and local laws and

regulations relating to the use, storage, handling, generation, transportation, treatment,

emission, discharge, disposal and remediation of, and eposure to, ha8ardous andnonha8ardous substances, materials, and wastes. @n particular, the G.5. :nvironmental

rotection Agency standards for the wood furniture manufacturing industry require

reduction of emissions of certain volatile organic compounds found in the coatings,

stains, and adhesives used by >t. ?ood. 9ompany officers believe that >t. ?oodEs

operations are in substantial compliance with all environmental laws.


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>t. ?ood urniture, @nc. is family owned and not publicly tradedD 1 million shares of C1

par common stoc are authori8ed. >aor stocholders include the founder, who recently

retired as chairman of the board, r. 5aws is 0 years old and until his retirement was closely

involved in all maor decisions affecting the company. ?e personally signed corporate

checs and supervised the companyEs operations. ?e is very proud of his companyEs

strong reputation for being ethical and for meeting its commitments and promises. ?is

son, 9onrad . 5aws, has wored in the business for the last 1( years, is the current

president and chairman of the board, and under his fatherEs guidance during the last (

years, has assumed the responsibility of overseeing the businessEs day+to+day

operations. 9onrad is also a 20 percent owner. 7ther family members own an additional

20 percent of the business. *he chief operating officer "977) and chief financial officer

"97) are the only nonfamily owners at ( percent each.

>t. ?oodEs senior management is comprised of 9onrad 5aws, the president and

chairman of the boardD %ames Foyle, the 977D and %ulia Anderson, the 97. Foyle

oined the company two years ago after woring for 12 years in the industry for a maor

office furniture manufacturer. Anderson has wored for the company for about 1(

months. 5he was an audit manager with t. ?ood

urniture, @nc.

*he board of directors includes the retired chairman "


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growing sales line6 office furniture that caters to a technology+based wor environment

where increasing the productivity and fleibility of increasingly epensive office space is

the driver. *hey are confident the company has assembled a management team

capable of improving profitability and sales.

3hen ased about the change in accounting firms, 9onrad 5aws informed >r. t. ?ood

move beyond the present. *his included assistance with financial planning "both

personal and for the company), developing better performance measures for the

company, and improving the incentive compensation plan for ey employees. #eginning

this year, the company put a bonus plan in place for ey eecutives based on sales

growth. *hey saw no reason for any scope limitations, and they epect the firm of


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the company consider venture capital to grow the company until it is ready for an @7.

@n the past, the maor lender has been the primary financial statement user, along with

several creditors, but the 97 plans to show the financial statements and in+house

proections to potential venture capitalists as well. 9urrent planned epansion costs are

estimated to require about C2 million in land, manufacturing, and distribution facilities,

which could raise revenues to C100 million.

ther ,n%ormtion After the interview, >r. r. 3ill #.

Funn, 9A, regarding the potential change in auditor. >r. Funn was not surprised that

>t. ?ood urniture was considering a change in auditor. ?e had been t. ?ood hired outside

management for the first time in company history, and with the hiring of a 97 for the

first time, he had epected this phone call. >r. Funn epressed no concern about the

integrity of management. 5everal years ago, >r. Funn said that 9onrad 5aws had

raised several questions with >r. Funn about revenue recognition on some possible

Hbill+and+holdI sales in advance of negotiating a sales agreement with a national office

supply and furniture chain. No problems were noted in the subsequent audit. >r. Funn

epressed concern about the current accounting system that was epected to be

replaced in &0B4. Audit adustments in the last few years resulted from cutoff problems,

from an adustment due to an error in counting inventory, and from discussions over bad

debt reserves. Funn noted that >s. Anderson was challenged by an accounting staff

that needed more training and an accounting system that was having difficulty eeping

up with the companyEs recent trend associated with the increased volume of

transactions. inally, he noted that if >r. r. t. ?ood urnitureEs baner and

outside legal counsel confirmed that company management had a reputation of acting

with integrity and honesty.

5innci ,n%ormtion Audited financial results for &0B1 and &0B&, along withunaudited financial information for &0B2 are included in 9hapter / "igure) as part ofroblem /+1/ along with relevant industry statistics.

"e#uired

b. Fraft an engagement letter for partner review. You may assume that the fee estimatefor audit services will run between C&0,000 and C&(,000, and the fee for ta services isestimated between C,(00 and C10,000. 5eparate proposals may be presented at alater date for additional services based on audit findings.


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t. ?ood urniture, @nc.1 Auditor =ane

Audit, 7regon 1&24(

Fear >r. 5aws,

t. ?ood urniture, @nc. *he company staff is proficient in doing

audits and has all the materials to avail a quality and timely delivery.

*he audit standards apply by the company will be in accordance with the -enerally

Accepted Accounting rinciples and in compliance with the 9A7#Js requirements. *he

audit will also adhere to local laws and regulations as related to environmental laws.

*he audit will eamine the financial statements of >t. ?ood urniture, @nc. and verify

that the information provided in the financial statements is clear of any misstatements.

*he eamination does not detect all material frauds.

*he statements that will need presented are the income statement, retained

earnings statement, and the cash flows statement for &0B2. *he audit conducted may

not detect different instances of material fraud. *he financial statements verification will

assist the auditor in forming an opinion on the statements representation. *he opinion

will state if the financial statements are conformed to the generally accepted accounting

principles and should an opinion be unable to be formed, that will be stated in the report

given to you following the audit.

t. ?ood urniture, @nc. to

be accurate and complete in nature. @f the auditor needs additional written

representations, the auditor will as management to provide this documentation.

*he estimated fees for services discussed concerning the audit will range from

C&0,000 and C&(,000 and for the ta return will range from C,(00 and C10,000. @n the

event that additional services may be required, a separate proposal will be presented at


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a date to be later specified. *hese additional services may relate to the audits findings

upon completion.

Documents

ACC 490 Week 3 Learning Team Ch. 6 & 7 Textbook Exercises.doc