Appendix $6$C Problems Illustrative Audit Case: Keystone Computers & Networks Inc.

Part I: Audit Planning

The Keystone Computers & Networks Inc. $($ KCN $)$ case is used throughout the text to illustrate audit procedures and methodology. KCN is

a company that sells and installs computer workstations and networking software to business customers. The CPA firm of Adams, Barnes

& Co$.$ has audited the financial statements of KCN for the past three years. This part of the case illustrates selective audit planning working

papers prepared by the staff of Adams, Barnes & Co$.$ for this year's audit. You should read through the information to obtain an

understanding of the nature of the information that is important to planning an audit engagement. The working papers include

The balance sheet and income statement for the company for the prior year, $20$X$4.$

A trial balance for $12/31/$X$5,$ with comparative amounts for $12/31/$X$4.$

The analytical ratios working paper, partially completed.

The overall audit strategy for the audit of the financial statements for the year ended $12/31/$X$5.$

A fraud risk assessment.

The engagement letter for the audit, presented in $$ Figure $6\mathrm{.}2$ of this chapter.

Cash

Trade receivables, less allowance for doubtful accounts of $$96,000$

Accounts receivable$-$officers

Inventory

Prepaid expenses

Total current assets

Equipment and leasehold improvements, at cost

Equipment and furniture

Leasehold improvements

Less accumulated depreciation

Intangible assets net of amortization

Liabilities and Stockholders' Equity

$ $53,964$

$8,438,524$

$57,643$

$1,234,589$

$156,900$

$ $9,941,620$

$ $1,090,634$

$98,900$

$ $1,189,534$

$(250,987)$

$ $938,547$

$ $1,000,000$

$$11,880,{167}_{{?}_{?}}$

Current Liabilities

Line of credit

$ $6,612,550$

$1,349,839$

Accounts payable

Current maturities of capital lease obligations

Accrued expenses

Total current liabilities

Capital lease obligations, less current maturities

Total liabilities

$43,200$

$178,900$

$ $8,184,489$

$$,456,700$

$ $8,641,189$

Stockholders' equity

LO $6-6$C$-1.$ Planning information for the audit of Keystone Computers & Networks Inc. appears in this appendix.

Review each major section of the audit plan and briefly describe the purpose and content of the section.

Organize your solution in the following manner:

LO $6-6$C$-2.$ In the overall audit strategy for the audit of Keystone Computers & Networks Inc. in this appendix, there is a

$3,4$ section on significant risks. For each of the risks, identify the implications and potential responses.

LO $6-6$C$-3.$ The overall audit strategy for the audit of Keystone Computers & Networks Inc. in this appendix includes a

$7$

section on significant accounting and auditing matters. The second matter described involves capitalizing

the costs of developing a software program for sale.

a$.$ Research this issue and write a brief memorandum for the working papers describing the issue and

summarizing the appropriate method of accounting for the development costs.

b$.$ Based on your research, describe the major audit issue that you believe will be involved in auditing the

software development costs.