2017 Audit of Beta Industries: Summary Information

Assume you are an audit manager, today is May 15, 2018, and your public accounting firm is currently planning the 2018 financial statement audit of Beta Home Goods, a retailer in the home goods and supply industry. Beta is a public company with a 12/31 year-end, and a new client for your firm. The audit partner has asked you to help plan the audit for this new client using the following information obtained and summarized by the engagement team, and the ratios you will calculate in the multiple choice questions below:

CEO. Sofia Ortega is Betas CEO and chairperson of the companys board of directors. She has been in this position for six years, and previously served as the CEO of a smaller company in the same industry. Her background prior to these top-level executive positions was in lower levels of management at the smaller competitor. Sofia serves as the chairperson of Betas Board of Directors.

CFO. Michael Barkley, CPA, is Betas CFO and a former auditor. He has worked at Beta in various accounting and financial reporting positions for nearly two decades, and has been CFO for six years.

Executive Compensation. In the past, 90% of executive compensation was through a base salary, with 10% dependent on whether the company meets its Basic EPS forecast. Beta has changed the mix this year such that 60% is base salary, with 40% dependent on meeting the basic EPS forecast.

Accounting for investment securities. A material portion of Betas investments is classified as Level 3 assets. Your audit senior offered a friendly reminder that if you dont remember asset classification from your financial accounting courses, a quick web search for Level 3 assets should help you determine if these investment securities are relatively easy or difficult to value.

Allowance for doubtful accounts. An inquiry conducted by the audit senior revealed that Beta has decreased the percentage of credit sales used to calculate the allowance from 6% of credit sales last year to 3% in 2018. The industry average is 6%. The CFO said they made the change because of a projected increase in days outstanding in receivables for 2018 compared to last year.

Acquisitions. Last month, Beta completed the acquisition of a competitor, and the company plans to complete a second acquisition this fall. Your audit team believes the second acquisition is very likely to be completed by the end of this year. Collectively, the acquisitions will double the assets of the company compared to last year (neither of the acquired companies are the previous employer of Betas CEO).

Predecessor Auditor. Beta received unqualified opinions from its predecessor auditor for the ten years. Beta wants to switch auditors because the company wants its predecessor auditor to provide consulting services. The predecessor auditor agrees that this is the reason for the change in auditors.

2017 Audited Financial Statements. See the accompanying Excel file.

Regulatory Environment. Your audit team does not expect significant changes in regulations for Betas industry this year. The industry is not heavily regulated.

Engagement Staffing. Eric Wall, a new staff auditor at your firm who was just assigned to the Beta audit, told you that his mother owns a material (to her) amount of Betas common stock. Eric does not believe this impairs his independence and wishes to stay on the audit.

Inherent Risk (IR) Assessment. Use the summary information and ratio analyses of last years financial statements to answer these questions.

1. List four issues from the summary information that could impact IR at Beta

2. Summarize the information from the predecessor auditor. How does this information impact overall IR? Explain your answer.

3. What is your assessment of inherent risk for Betas allowance for doubtful accounts (low, moderate, or high)? Explain your answer.

4. What is your overall IR assessment (low, moderate, or high)? Support your conclusion using the summary information in this document and the 2016 financial statements

Audit Engagement Staffing

5. Describe your responsibility to the public interest in considering Erics issue? How does this responsibility impact your consideration of whether to remove him from the Beta audit?

6. Will you allow Eric to serve on the Beta audit? Explain your reasoning, including how investors and regulators might view his participation on the audit.

7. Assume an auditor in Erics position was allowed to stay on the Beta audit. Could this person be objective (be sure to explain your answer)? What specific advice would you give this person on how to maintain her/his objectivity?

Gi Gamma Industries Gamm Lndustries Consolidated Balance Sheet (Unaudited) December 31. 2017 3Consolidated Statement of Income (Unaudited) December 31. 2017 6 Net Sales 7 Cost of Sales $1.643.575 1,053.384 590.191 458.107 132,085 Assets Liabilities & Stockholders Equity Current Assets Cash and cquivalents Accounts Receivable, net Inventory Prepaid E Current Liabilities Gross Profit $369.801 203,392 7,149,55,3 355,937 8.078,686 Accounts Payable Accried Liabilities Income Taxes $1,718,666 1,426,493 85,933 3,231,092 SGA 10 Operating Income 11 lnterest E 12 Income Before Taxes 13 Income Tax Provision 14 Net Tncome 15 16 Basic EPS Total Cureut Liabilities Total Curent Assets 122.839 42.994 79.845 Notcs Payable Total iabilities $2,882.20:3 6,113,296 Property, Plant & Equipment Land and Buildings Equie and Vehicles IT Hardware and Software Accumulated Depreciation & Amortizatio $994,589 954.806 1.061,210 (646,483) 2,367,122 0.80 Stockholders' Equity 18-Credit sales are equal to 87% of net sales 19 20 21 Common Stock, 100,000 shares issued & outstanding Additional Paid-in-Capital Accumulated Other Comprehensive Income $100,000 1,520,000 520,000 1892,513 4,332.512 Properry, Plant& Fquipment, net Retained Eanin Total Stockolders' Equity 23 Total Assets S10,445,808 Total Liabilities & Stockholders' Equity S10,445,809