1 ABC, Inc. 2 Analytical Review Procedures 3 Year Ended December 31, 2017 It is January 2018 and you are a staff accountant assigned to the 2017 audit of ABC Inc. ABC is a closely held corporation managed by the founder and principal shareholder, Agatha Bernice Christy. Your firm has audited ABC for the last five years. The audited financial statements for the years ended December 31, 2016 and 2015 are presented below. with the 4 client's unaudited financial statements for 2017 5 Additional Information: 6 - ABC manufactures and sells drones for industrial use and cattle prods for ranching 7 All sales are on credit. Credit terms are net 30 days. 8 ABC offers a one-year warranty covering manufacturing defects. ABC uses a periodic inventory system and determines its year-end inventory by taking a physical count on December 31. You and your supervisor observed the count on December 31, 2017 and performed numerous test counts, but you have not performed further audit tests regarding inventory. 9 10 The interest rate on all debt is 8 percent. Annual interest and principal payments are duc cach December 1. 11 - Average Common Shares Outstanding is 10,000 for each year. 12 INCOME STATEMENTS (S000's) 2016 2015 $ 11 - Average Common Shares Outstanding is 10.000 for each year. 12 INCOME STATEMENTS (S000's) 13 Years ended December 31 2017 4 Sales revenue 7.750 $ 15 Cost of goods sold 5.505 16 Gross profit 2.245 17 Selling and general expenses 1,631 18 Depreciation expense 46 19 Warranty expense 75 Bad debt expense 90 21 Legal fees 53 22 110 23 Income before taxes 240 24 Income tax expense 71 25 Net income $ 169 $ 26 27 Dividends paid 125 S 8 7.713 $ 5.381 2,332 1.622 55 65 85 7.493 5.225 2.268 1.577 49 55 90 14 Interest expense 127 12 135 350 364 104 109 255 $ 246 125 $ 100 28 The following schedule shows the sales revenue and components of costs of goods sold for each of ABC's 29 two products 30 31 SCHEDULES OF GROSS PROFIT (S000's) 32 Years ended December 31 2017 2016 2015 33 Drones 34 Sales 4.880 $ 4.932 S 4.791 35 Cost of goods sold: 36 Materials 1,895 1.835 1.781 37 Labor 1,103 1.074 1.043 38 Overhead 689 664 662 39 Standard cost variances 3 5 40 Depreciation 50 70 68 41 3,740 3,648 3.550 42 Gross Profit 1.140 $ 1.284 $ 1.241 43 44 Cattle Prods 45 Sales 2.870 $ 2.781 $ 2.702 46 Cost of goods sold: 47 Materials 888 868 840 48 Labor 537 532 SOS A B H C D Labor Overhead Standard cost variances Depreciation E 1.103 689 F 1.074 664 G 1,043 662 3 5 50 3,740 1.140 $ 70 3.648 1.284 $ 68 3.550 1.241 Gross Profit $ $ 2.870 S 2.781 $ 2.702 888 868 Cattle Prods Sales Cost of goods sold: Materials Labor Overhead Standard cost variances Depreciation 537 840 505 270 2 301 (2) 41 1.765 1,105 $ 532 276 (3) 60 1,733 1,048 58 Gross Profit 1.675 1.027 S B D H . $ E 2017 36 $ 795 (70) F 2016 165 $ 674 (60) G 2015 77 658 (60) 322 304 286 710 Cash Accounts receivable Allowance for Bad debt allowance Inventories: Raw materials (at cost) Finished goods: (at standard) Drones Cattle Prods Prepaid expenses Current assets Land Building and equipment Accumulated L depreciation Total assets 913 405 374 . 58 December 31 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 738 390 2 2.213 8 4 450 2.409 450 1.865 (895) 3,829 $ 1.858 (790) 3,731 $ 2.049 450 1.831 (610) 3,720 $ S 675 837 $ 16 694 13 14 10 11 40 Accounts payable Taxes payable Accrued interest Warranty liability Current portion of long-term debt Current liabilities Long-term debt Total liabilities Paid-in-capital Retained earnings Thalatandaalde uit 80 40 100 993 1.300 2.293 550 986 81 82 83 100 839 1.400 2.239 550 942 40 100 858 1,500 2.358 550 812 24 913 405 738 390 710 374 8 2 4 Finished goods: (at standard) Drones Cattle Prods Prepaid expenses Current assets Land Building and equipment Accumulated I depreciation Total assets 2,409 450 1.865 (895) 3,829 $ 2.213 450 1.858 (790) 3,731 $ 2.049 450 1.831 (610) 3,720 $ $ 694 54 55 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 Required: 837 $ 16 13 11 40 100 Accounts payable Taxes payable Accrued interest Warranty liability Current portion of long-term debt Current liabilities Long-term debt Total liabilities Paid-in-capital Retained eartungs Total stockholders'equity Total liabilities and equity 40 100 993 1.300 2.293 858 675 14 10 40 100 839 1,400 2.239 550 942 1.492 3,731 550 1.500 2.358 550 812 1,362 3,720 986 1.536 3.829 $ $ You are in the Planning phase of the audit. The engagement partner has asked you to perform analytical procedures to identify potential risks and areas of audit focus in ABC Ine's 2017 financial statements. Perform the following analytical procedurres on the financial statements and identify issues that you believe require special attention in the 2017 audit. 2.) 3 Prepare a Horizontal (Trend) Analysis of the Balance Sheet and Income Statement for 2017 compared to 2016. Show the change in dollars and the percentage change for each account. Your audit planning materiality indicates that any variances greater than 10% year over year should be further investigated. Identify the potential audit implications for each balance to be investigated Prepare Common Size Financial Statements (Vertical Analysis) for 2017, 2016 and 2015 Identify fluctuations you believe should be investigated and indicate the potential accounting and/or operating issues that should be investigated Compute the ratios included on the KPI Ratio Listing for 2017 and 2016. Determine if there are ratios that you should investigate and indicate the potential causes of these ratio changes. Using the information from Steps 1. 2. and 3. above, identify 4 findings and complete the Interim Audit Findi and briefly state the primary audit procedure(s) you recommend. 9 3.) 30 21 02 4.) 3 1 ABC, Inc. 2 Analytical Review Procedures 3 Year Ended December 31, 2017 It is January 2018 and you are a staff accountant assigned to the 2017 audit of ABC Inc. ABC is a closely held corporation managed by the founder and principal shareholder, Agatha Bernice Christy. Your firm has audited ABC for the last five years. The audited financial statements for the years ended December 31, 2016 and 2015 are presented below. with the 4 client's unaudited financial statements for 2017 5 Additional Information: 6 - ABC manufactures and sells drones for industrial use and cattle prods for ranching 7 All sales are on credit. Credit terms are net 30 days. 8 ABC offers a one-year warranty covering manufacturing defects. ABC uses a periodic inventory system and determines its year-end inventory by taking a physical count on December 31. You and your supervisor observed the count on December 31, 2017 and performed numerous test counts, but you have not performed further audit tests regarding inventory. 9 10 The interest rate on all debt is 8 percent. Annual interest and principal payments are duc cach December 1. 11 - Average Common Shares Outstanding is 10,000 for each year. 12 INCOME STATEMENTS (S000's) 2016 2015 $ 11 - Average Common Shares Outstanding is 10.000 for each year. 12 INCOME STATEMENTS (S000's) 13 Years ended December 31 2017 4 Sales revenue 7.750 $ 15 Cost of goods sold 5.505 16 Gross profit 2.245 17 Selling and general expenses 1,631 18 Depreciation expense 46 19 Warranty expense 75 Bad debt expense 90 21 Legal fees 53 22 110 23 Income before taxes 240 24 Income tax expense 71 25 Net income $ 169 $ 26 27 Dividends paid 125 S 8 7.713 $ 5.381 2,332 1.622 55 65 85 7.493 5.225 2.268 1.577 49 55 90 14 Interest expense 127 12 135 350 364 104 109 255 $ 246 125 $ 100 28 The following schedule shows the sales revenue and components of costs of goods sold for each of ABC's 29 two products 30 31 SCHEDULES OF GROSS PROFIT (S000's) 32 Years ended December 31 2017 2016 2015 33 Drones 34 Sales 4.880 $ 4.932 S 4.791 35 Cost of goods sold: 36 Materials 1,895 1.835 1.781 37 Labor 1,103 1.074 1.043 38 Overhead 689 664 662 39 Standard cost variances 3 5 40 Depreciation 50 70 68 41 3,740 3,648 3.550 42 Gross Profit 1.140 $ 1.284 $ 1.241 43 44 Cattle Prods 45 Sales 2.870 $ 2.781 $ 2.702 46 Cost of goods sold: 47 Materials 888 868 840 48 Labor 537 532 SOS A B H C D Labor Overhead Standard cost variances Depreciation E 1.103 689 F 1.074 664 G 1,043 662 3 5 50 3,740 1.140 $ 70 3.648 1.284 $ 68 3.550 1.241 Gross Profit $ $ 2.870 S 2.781 $ 2.702 888 868 Cattle Prods Sales Cost of goods sold: Materials Labor Overhead Standard cost variances Depreciation 537 840 505 270 2 301 (2) 41 1.765 1,105 $ 532 276 (3) 60 1,733 1,048 58 Gross Profit 1.675 1.027 S B D H . $ E 2017 36 $ 795 (70) F 2016 165 $ 674 (60) G 2015 77 658 (60) 322 304 286 710 Cash Accounts receivable Allowance for Bad debt allowance Inventories: Raw materials (at cost) Finished goods: (at standard) Drones Cattle Prods Prepaid expenses Current assets Land Building and equipment Accumulated L depreciation Total assets 913 405 374 . 58 December 31 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 738 390 2 2.213 8 4 450 2.409 450 1.865 (895) 3,829 $ 1.858 (790) 3,731 $ 2.049 450 1.831 (610) 3,720 $ S 675 837 $ 16 694 13 14 10 11 40 Accounts payable Taxes payable Accrued interest Warranty liability Current portion of long-term debt Current liabilities Long-term debt Total liabilities Paid-in-capital Retained earnings Thalatandaalde uit 80 40 100 993 1.300 2.293 550 986 81 82 83 100 839 1.400 2.239 550 942 40 100 858 1,500 2.358 550 812 24 913 405 738 390 710 374 8 2 4 Finished goods: (at standard) Drones Cattle Prods Prepaid expenses Current assets Land Building and equipment Accumulated I depreciation Total assets 2,409 450 1.865 (895) 3,829 $ 2.213 450 1.858 (790) 3,731 $ 2.049 450 1.831 (610) 3,720 $ $ 694 54 55 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 Required: 837 $ 16 13 11 40 100 Accounts payable Taxes payable Accrued interest Warranty liability Current portion of long-term debt Current liabilities Long-term debt Total liabilities Paid-in-capital Retained eartungs Total stockholders'equity Total liabilities and equity 40 100 993 1.300 2.293 858 675 14 10 40 100 839 1,400 2.239 550 942 1.492 3,731 550 1.500 2.358 550 812 1,362 3,720 986 1.536 3.829 $ $ You are in the Planning phase of the audit. The engagement partner has asked you to perform analytical procedures to identify potential risks and areas of audit focus in ABC Ine's 2017 financial statements. Perform the following analytical procedurres on the financial statements and identify issues that you believe require special attention in the 2017 audit. 2.) 3 Prepare a Horizontal (Trend) Analysis of the Balance Sheet and Income Statement for 2017 compared to 2016. Show the change in dollars and the percentage change for each account. Your audit planning materiality indicates that any variances greater than 10% year over year should be further investigated. Identify the potential audit implications for each balance to be investigated Prepare Common Size Financial Statements (Vertical Analysis) for 2017, 2016 and 2015 Identify fluctuations you believe should be investigated and indicate the potential accounting and/or operating issues that should be investigated Compute the ratios included on the KPI Ratio Listing for 2017 and 2016. Determine if there are ratios that you should investigate and indicate the potential causes of these ratio changes. Using the information from Steps 1. 2. and 3. above, identify 4 findings and complete the Interim Audit Findi and briefly state the primary audit procedure(s) you recommend. 9 3.) 30 21 02 4.) 3