ACCT 4400

Individual Assignment: Audit Planning

Assignment Background: Capstone Core Objective Assessment

This assignment involves planning the audit for a hypothetical audit client, and serves as a capstone assessment. By completing this assignment, you will demonstrate each of the following core objectives:

Critical Thinking Skills (CT) - to include creative thinking, innovation, inquiry, and analysis, evaluation and synthesis of information

Communication Skills (CS) - to include effective development, interpretation and expression of ideas through written, oral and visual communication

Empirical and Quantitative Skills (EQS) - to include the manipulation and analysis of numerical data or observable facts resulting in informed conclusions

Social Responsibility (SR) - to include intercultural competence, knowledge of civic responsibility, and the ability to engage effectively in regional, national, and global communities

The information and questions needed to complete the assignment begin on page 2.

Complete on the provided Template, do not change the structure of the template (add/remove lines, etc.)

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 Beta's CEO and chairperson of the company's 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 Beta's Board of Directors.
• CFO. Michael Barkley, CPA, is Beta's 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 Beta's investments is classified as Level 3 assets. Your audit senior offered a friendly reminder that if you don't 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 Beta's 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 Beta's 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 Beta's common stock. Eric does not believe this impairs his independence and wishes to stay on the audit.

Questions to Submit to the Professor

These questions address issues related to audit planning such as analytical procedures, inherent risk assessment, and audit engagement staffing. This assignment will be completed on the provided template via blackboard.

Part 1: Analytical Procedures using the 2017 Financial Statements

1. A An auditor calculating Beta's quick ratio should exclude which of the following item(s) from current assets?
2. n auditor calculating Beta's quick ratio should exclude which of the following item(s) from current assets?
3. Cash and equivalents
4. Inventory
5. Prepaid Expenses
6. B & C only

1. The numerator of Beta's receivables turnover is equal to
2. Sixty-four percent of Beta's cost of sales
3. Eighty-seven percent of Beta's net sales
4. Ninety-three percent of Beta's cost of sales
5. Ninety-three percent of Beta's net sales

1. An auditor calculating Beta's inventory turnover should include which financial statement item in the numerator?
2. Cost of goods sold
3. Inventory
4. Sales
5. Total current assets

1. An auditor calculating Beta's current ratio should include which financial statement item in the denominator?
2. Current assets
3. Current liabilities
4. Interest expense
5. Long-term debt

1. Assuming a 360 day year, Beta's days outstanding in accounts receivables is __ days.
2. 47.90
3. 48.57
4. 61.55

1. Beta's quick ratio is __ %.
2. 0.18
3. 0.30
4. 2.72
5. Beta's return on assets (ROA) is __ %.
6. 0.76
7. 1.35
8. 1.84

1. Beta's current ratio is
2. 2.35
3. 2.50
4. 2.72

1. Assume Beta's usual credit terms are 2/10, net 30. Beta's days outstanding in accounts receivables suggests bad debts are likely __ to accounts receivable.
2. Immaterial
3. Material
4. Neither A nor B: Bad debts have no relationship with accounts receivable

1. Beta's profit margin, relative to the industry of average of 12%, suggests a __ level of detection risk.
2. Low
3. High
4. Neither A nor B: profit margin is irrelevant to detection risk

1. Beta's ROA, relative to the industry average of 4%, suggests a __ level of inherent risk.
2. Low
3. High
4. Neither A nor B: ROA is irrelevant to assessing inherent risk

1. Beta's current ratio may be distorted because the company
2. Has not fully depreciated and amortized all of its fixed assets
3. Did not present diluted EPS in its financial statements
4. Likely has a high level of bad debts

Part 2: Inherent Risk (IR) Assessment. Use the summary information on p.2 and ratio analyses of last year's financial statements to answer these questions.

1. List four issues from the summary information on p.2 that could impact IR at Beta

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

1. What is your assessment of inherent risk for Beta's allowance for doubtful accounts (low, moderate, or high)? Explain your answer.

1. 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, including the analytical procedures you performed in Part 1.

Part 3: Audit Engagement Staffing

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

1. 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.

1. Assume an auditor in Eric's 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?