Attached is a scenario and list of questions required for a 5 to 7 page paper.

Executive Summary Smackey Dog Foods, Inc, created by sisters, Kim, Jillian and Sarah was a private start-up company that began in a kitchen in Chicago, IL. All sisters were active participants in the business and held key roles. Sarah was an effective president and general manger with a talent for growing the business. Production, inventory and shipments were run by Kim. Lastly, Jillian was in charge of sales. The business grew rapidly, distribution was no issue and demand dictated that additional staff be hired. After a successful year, a second division, Best Boy Gourmet was created. This division differed in that it was a specialty one serving dog food made fresh to be consumed in no more than three days. Being a specialty product, it had to be ordered through the website, demand was high and the product yielded three times the profit of the original product. The drawback of the new product was the high amount of waste. With the continued success and growth of the business Sarah meets with the bank to obtain financing a second loan in the amount of $150,000. The loan would be financed by account receivables and used to expand facilities and equipment. The original loan was for $150,000 and was secured by the company's industrial-size production equipment that was purchased using the funds. Worksheet for You Decide Name ____________ Course Code _________ Grade ___/ Date__/__/__ Questions: Q1: Discuss how the SEC has influence (if any) over the audit of Smackey Dog Foods, Inc. Solution: Type your answer here Q2: Discuss the essential activities involved in the initial planning of an audit. How do these all specifically to the Smackey Dog Food client? Solution: Type your answer here Q3: Discuss the 4 stages of the audit and the major activities performed by the auditor in each phase. Give an example of how each of these specifically applies to the Smackey Dog Food, Inc audit. For instance, examine the apparent internal control weaknesses and possible negative outcome of each. Solution: Type your answer here Q4: Describe Keller CPAs' responsibilities related to communications regarding internal control matters. What internal controls issues do you identify? Solution: Type your answer here Q5: You decide that you will address Smackey Dog Food, Inc.'s accounts receivables through confirmations. Discuss the various types of confirmations and what forms you will implement and why. Solution: Type your answer here Q6: What are the major factors affecting sample size for confirming accounts receivable? Solution: Type your answer here Q7: A major issue in verifying the ending balance in property, plant and equipment is the possibility of legal encumbrances. Discuss what specific concern do you have. Describe the procedures your firm will perform to obtain evidence about existing legal encumbrances. Solution: Type your answer here Q8: The client wants to know if you will be present at the year-end inventory. What is your decision and why? What role or actions will you take at the inventory if you decide to attend the inventory. Why? Solution: Type your answer here Q9: Considering the general six functions that make up the inventory and warehousing cycle for Smackey Dog Foods, Inc., identify the related documents and/or records that would be used. From your analysis of the internal controls related to the inventory and warehousing cycle of Smackey Dog Foods, Inc., what internal control weaknesses exist? Solution: Type your answer here Q10: Discuss if Keller CPAs or its auditors are breaching any Professional Rules of Conduct and why or why not? Solution: Type your answer here Q11: Discuss the CPA firm's legal liability concerns for this audit if they make a material unintentional or intentional mistake. Include any other legal liability concerns regarding possible Professional Rule violations. Solution: Type your answer here Questions: Q1: Discuss how the SEC has influence (if any) over the audit of Smackey Dog Foods, Inc. Solution: The Securities and Exchange Commission has a significant influence on the audit of Smackey Dog Foods, Inc. by Keller CPAs. This influence can be observed in the audit standards that have to be followed in establishing the independence of auditors involved in the audit of Smakey. In the audit of publicly listed companies including Smackey, auditors need to observe principles. Independence is one of the six ethical principles of the American Institute of Certified Public Accountants (AICPA) Code of Professional Conduct. The other principles are responsibilities, the public interest, integrity, objectivity and independence, due care, and scope and nature of services. More specifically, audit team members are required to be objective and independent with regard to the audit by maintaining objectivity and being free of conflicts of interest in discharging professional responsibilities and by being independent in fact and appearance when providing auditing and other attestation services (p. 82). In here the influence of the SEC is very obvious. Under the SOX, auditors have to be objective and independent otherwise legal sanctions can be incurred. Although the above standards are enforceable for the audit of public companies, it can also be applied to the audit of non public companies like Smackey Dog Foods, Inc. Q2: Discuss the essential activities involved in the initial planning of an audit. How do these all specifically to the Smackey Dog Food client? Solution: The following are several of the essential activities involved in the initial planning of an audit and as they relate to Smackey Dog Food, Inc. 1. Understand the client's business and industry. The audit firm can capitalize on its experience in auditing other food manufacturer in planning and doing the audit for Smackey. So far, members of the Audit team, the audit manager Pete and two audit staffers Ben and Maureen, have to understand the client's business and industry. 2. Assess client business risk. Business risk is the risk that Smackey will fail to achieve its objectives. In this activity, the audit team assesses the risk of material misstatements arising from Smackey's business risk. For example, the high wastage in Smackey's Best Dog division presents a lot of business risk, and therefore material misstatement risk. 3. Perform preliminary analytical procedures. Keller CPAs needs to compare the performance of Smackey's with the industry to further support its initial assessment of business risk. These analytical procedures help the audit team indentify areas where the risks of misstatement are very high. 4. Set materiality and assess acceptable audit risk and inherent risk. The Smackey audit team now has to set the acceptable level of materiality. The circumstances of Smackey have to be taken into account in setting materiality level as this level is purely a relative and subject to auditor's judgment. 5. Develop overall audit plan and audit program. The audit plan and program aims to achieve the audit risk objectives of the audit team and to provide reasonable assurance and basis for the audit report and opinion. Q3: Discuss the 4 stages of the audit and the major activities performed by the auditor in each phase. Give an example of how each of these specifically applies to the Smackey Dog Food, Inc audit. For instance, examine the apparent internal control weaknesses and possible negative outcome of each. Solution: The four stages of audit and how each of the major activities specifically applies to the audit of Smackey Dog Food, Inc. are: 1. Planning and risk assessment. For Smackey, the risks can initially be assessed by obtaining understanding of Smackey's business and its industry. More specifically, the design and implementation of the client's internal control procedures, processes and systems are studied and analyzed for the audit team to be able to assess the control risk for each of the transactionrelated audit objective - occurrence, completeness, accuracy, classification, timing and posting and summarization. 2. Test of internal controls. The audit team can perform tests of controls by making inquiries of appropriate client personnel, examining documents, records, and reports maintained by Smackey, observing control-related activities such as the one done for the inventory procedures for returned Best Boy Gourmet dog food, and reperforming client procedures. 3. Substantive tests. The Smackey audit team needs to perform substantive tests on the balances of the accounts receivables and inventory accounts. Moreover, substantive tests can be done through performing substantive tests of transactions, analytical procedures and test of details of balances. 4. Audit finalization. At this stage, the audit team compiles a report to Smackey's management as regards matters that came to the team's attention during the audit, evaluates and reviews the audit evidence obtained in the audit, and considers the audit opinion to be issued based on the evidence obtained. Q4: Describe Keller CPAs' responsibilities related to communications regarding internal control matters. What internal controls issues do you identify? Solution: Generally accepted auditing standards and professional conduct requires that the auditor communicate, in writing, to management and those charged with governance, significant deficiencies and material weaknesses identified in an audit. The following internal control issues were identified as regards the audit for Smackey Dog Food, Inc. and thus have to be communicated to appropriate people within Smackey: 1. Granting of commissions to sales people based on estimated sales. This internal control issue presents risks as regards the company's financial resources as sales people might be paid for sales not made, and there is no refund process for commissions paid for this type of sale. 2. Segregation of duties as regards the handling of inventory. With a single person assigned with the preparation and approving all inventory records, the changes of material misstatements are high. 3. Lack of control procedures and guidelines in handling returned dog foods which presented opportunities wherein employees take home returned items. 4. Lack of control procedures and guidelines in handling and recording accounts receivable. This is much more important now since a major client which represents 31 per cent of total sales is experience financial difficulty. Moreover, the urgency of these procedures and guidelines is in light of the magnitude of receivables (29 per cent of total assets). Q5: You decide that you will address Smackey Dog Food, Inc.'s accounts receivables through confirmations. Discuss the various types of confirmations and what forms you will implement and why. Solution: There are two general classifications of accounts receivable confirmation: 1) positive and 2) negative confirmations. Positive confirmations are confirmations that asked debtors to confirm directly to the auditors whether the balance of the accounts receivable from the debtors is correct or not. Examples of positive confirmations are blank and invoice confirmation forms. A negative confirmation requests debtors to respond only when they disagree with the stated amount in the confirmation form. As to the audit of Smackey Dog Food, Inc.'s accounts receivables, I will implement an invoice confirmation form under the positive confirmation approach. Q6: What are the major factors affecting sample size for confirming accounts receivable? Solution: The following are factors affect the sample size for confirming accounts receivable: 1. Tolerable accounts receivable and financial statement misstatement. 2. Inherent risk which is dependent on the size of total accounts receivable, the number of accounts, prior-year results, and expected misstatements. 3. Control risk. 4. Achieved detection risk based on other substantive tests, and 5. Type of confirmation. Generally a positive confirmation requires a smaller number of sample size. Q7: A major issue in verifying the ending balance in property, plant and equipment is the possibility of legal encumbrances. Discuss what specific concerns you have. Describe the procedures your firm will perform to obtain evidence about existing legal encumbrances. Solution: Keller CPAs will need to perform the following to obtain evidence about existing legal encumbrances include: 1. Inquiry with property, plant and equipment custodians 2. Review of minutes of meetings 3. Review of items noted during property, plant and equipment inventory observations 4. Confirmation of the client's liabilities 5. Reading and reviewing lease agreements 6. Reading and reviewing property, plant and equipment purchase contracts and agreements The above procedures aim to assess whether encumbrances and liens to the property, plant and equipment have been identified and whether property currently pledged as collateral on a loan has not been sold or damaged. Q8: The client wants to know if you will be present at the year-end inventory. What is your decision and why? What role or actions will you take at the inventory if you decide to attend the inventory? Why? Solution: The presence of the audit team during the year-end inventory taking is necessary. The representation of the audit team provides assurance that the physical count was carried out carefully and systematically by persons fully informed of the duties involved. Thus, the auditor's responsibility is to ascertain whether the client's employees are carrying out their instructions properly during the count. During the count, the auditor needs to test the efficiency of the counting by arranging for a count or a recount of selected items in the audit team's presence. Moreover, the auditor will be taking notes considered necessary to be followed up. These can include details of items of inventory selected so that the particulars may be checked to the final count sheets; lists of items actually counted in the auditor's presence; details of any inventory noted by the auditor as being obviously defective, damaged or slow-moving; and details of instances where the client's physical count procedures were not carried out. Q9: Considering the general six functions that make up the inventory and warehousing cycle for Smackey Dog Foods, Inc., identify the related documents and/or records that would be used. From your analysis of the internal controls related to the inventory and warehousing cycle of Smackey Dog Foods, Inc., what internal control weaknesses exist? Solution: The six general functions that make up the client's inventory and warehousing cycle are: 1. Processing of purchase orders - purchase requisitions, quotations from suppliers, and purchase orders 2. Receipt of purchased materials - receiving report 3. Storage of materials or inventory - materials requisition form 4. Processing raw materials - job cost sheet, process cost sheets 5. Storage of finished goods - sales invoice, sales order form. 6. Shipping finished goods - shipping form and invoices. Internal control weaknesses observed as regards Smackey's inventory and warehousing cycles are: 1. No procedures for the receipt, storage and disposal of returned dog foods. 2. Processing purchase orders, receipt of purchased materials, storage of raw materials and finished goods, particularly the documents supporting these functions, are handled by a single person. Breaches in internal control in this case are very high. Q10: Discuss if Keller CPAs or its auditors are breaching any Professional Rules of Conduct and why or why not? Solution: Yes, unfortunately the members of the audit team assigned to Smackey's are breaching any Professional Rules of Conduct. One violation is under confidentiality. In the case, Pete, a member of the audit team, has been discussing details of the audit to Alan over few beers. Ethical conduct and principles require that auditors maintain integrity in performing all responsibilities as regards the audit with the highest sense of integrity. Not disclosing and discussing details of the audit with people not members of the audit team is part of this responsibility. Q11: Discuss the CPA firm's legal liability concerns for this audit if they make a material unintentional or intentional mistake. Include any other legal liability concerns regarding possible Professional Rule violations. Solution: The audit profession agrees that the failure of an audit to uncover material misstatements which then resulted to the issuance of an incorrect audit opinion makes the auditor's discharge of his audit responsibility and services questionable, particularly on whether such were exercised with due care. However, how the auditor performed his responsibility as regards the audit and the extent of the damage incurred by third parties relying on the financial statements will determine his legal liability. Questions: Q1: Discuss how the SEC has influence (if any) over the audit of Smackey Dog Foods, Inc. Solution: The Securities and Exchange Commission has a significant influence on the audit of Smackey Dog Foods, Inc. by Keller CPAs. This influence can be observed in the audit standards that have to be followed in establishing the independence of auditors involved in the audit of Smakey. In the audit of publicly listed companies including Smackey, auditors need to observe principles. Independence is one of the six ethical principles of the American Institute of Certified Public Accountants (AICPA) Code of Professional Conduct. The other principles are responsibilities, the public interest, integrity, objectivity and independence, due care, and scope and nature of services. More specifically, audit team members are required to be objective and independent with regard to the audit by maintaining objectivity and being free of conflicts of interest in discharging professional responsibilities and by being independent in fact and appearance when providing auditing and other attestation services (p. 82). In here the influence of the SEC is very obvious. Under the SOX, auditors have to be objective and independent otherwise legal sanctions can be incurred. Although the above standards are enforceable for the audit of public companies, it can also be applied to the audit of non public companies like Smackey Dog Foods, Inc. Q2: Discuss the essential activities involved in the initial planning of an audit. How do these all specifically to the Smackey Dog Food client? Solution: The following are several of the essential activities involved in the initial planning of an audit and as they relate to Smackey Dog Food, Inc. 1. Understand the client's business and industry. The audit firm can capitalize on its experience in auditing other food manufacturer in planning and doing the audit for Smackey. So far, members of the Audit team, the audit manager Pete and two audit staffers Ben and Maureen, have to understand the client's business and industry. 2. Assess client business risk. Business risk is the risk that Smackey will fail to achieve its objectives. In this activity, the audit team assesses the risk of material misstatements arising from Smackey's business risk. For example, the high wastage in Smackey's Best Dog division presents a lot of business risk, and therefore material misstatement risk. 3. Perform preliminary analytical procedures. Keller CPAs needs to compare the performance of Smackey's with the industry to further support its initial assessment of business risk. These analytical procedures help the audit team indentify areas where the risks of misstatement are very high. 4. Set materiality and assess acceptable audit risk and inherent risk. The Smackey audit team now has to set the acceptable level of materiality. The circumstances of Smackey have to be taken into account in setting materiality level as this level is purely a relative and subject to auditor's judgment. 5. Develop overall audit plan and audit program. The audit plan and program aims to achieve the audit risk objectives of the audit team and to provide reasonable assurance and basis for the audit report and opinion. Q3: Discuss the 4 stages of the audit and the major activities performed by the auditor in each phase. Give an example of how each of these specifically applies to the Smackey Dog Food, Inc audit. For instance, examine the apparent internal control weaknesses and possible negative outcome of each. Solution: The four stages of audit and how each of the major activities specifically applies to the audit of Smackey Dog Food, Inc. are: 1. Planning and risk assessment. For Smackey, the risks can initially be assessed by obtaining understanding of Smackey's business and its industry. More specifically, the design and implementation of the client's internal control procedures, processes and systems are studied and analyzed for the audit team to be able to assess the control risk for each of the transactionrelated audit objective - occurrence, completeness, accuracy, classification, timing and posting and summarization. 2. Test of internal controls. The audit team can perform tests of controls by making inquiries of appropriate client personnel, examining documents, records, and reports maintained by Smackey, observing control-related activities such as the one done for the inventory procedures for returned Best Boy Gourmet dog food, and reperforming client procedures. 3. Substantive tests. The Smackey audit team needs to perform substantive tests on the balances of the accounts receivables and inventory accounts. Moreover, substantive tests can be done through performing substantive tests of transactions, analytical procedures and test of details of balances. 4. Audit finalization. At this stage, the audit team compiles a report to Smackey's management as regards matters that came to the team's attention during the audit, evaluates and reviews the audit evidence obtained in the audit, and considers the audit opinion to be issued based on the evidence obtained. Q4: Describe Keller CPAs' responsibilities related to communications regarding internal control matters. What internal controls issues do you identify? Solution: Generally accepted auditing standards and professional conduct requires that the auditor communicate, in writing, to management and those charged with governance, significant deficiencies and material weaknesses identified in an audit. The following internal control issues were identified as regards the audit for Smackey Dog Food, Inc. and thus have to be communicated to appropriate people within Smackey: 1. Granting of commissions to sales people based on estimated sales. This internal control issue presents risks as regards the company's financial resources as sales people might be paid for sales not made, and there is no refund process for commissions paid for this type of sale. 2. Segregation of duties as regards the handling of inventory. With a single person assigned with the preparation and approving all inventory records, the changes of material misstatements are high. 3. Lack of control procedures and guidelines in handling returned dog foods which presented opportunities wherein employees take home returned items. 4. Lack of control procedures and guidelines in handling and recording accounts receivable. This is much more important now since a major client which represents 31 per cent of total sales is experience financial difficulty. Moreover, the urgency of these procedures and guidelines is in light of the magnitude of receivables (29 per cent of total assets). Q5: You decide that you will address Smackey Dog Food, Inc.'s accounts receivables through confirmations. Discuss the various types of confirmations and what forms you will implement and why. Solution: There are two general classifications of accounts receivable confirmation: 1) positive and 2) negative confirmations. Positive confirmations are confirmations that asked debtors to confirm directly to the auditors whether the balance of the accounts receivable from the debtors is correct or not. Examples of positive confirmations are blank and invoice confirmation forms. A negative confirmation requests debtors to respond only when they disagree with the stated amount in the confirmation form. As to the audit of Smackey Dog Food, Inc.'s accounts receivables, I will implement an invoice confirmation form under the positive confirmation approach. Q6: What are the major factors affecting sample size for confirming accounts receivable? Solution: The following are factors affect the sample size for confirming accounts receivable: 1. Tolerable accounts receivable and financial statement misstatement. 2. Inherent risk which is dependent on the size of total accounts receivable, the number of accounts, prior-year results, and expected misstatements. 3. Control risk. 4. Achieved detection risk based on other substantive tests, and 5. Type of confirmation. Generally a positive confirmation requires a smaller number of sample size. Q7: A major issue in verifying the ending balance in property, plant and equipment is the possibility of legal encumbrances. Discuss what specific concerns you have. Describe the procedures your firm will perform to obtain evidence about existing legal encumbrances. Solution: Keller CPAs will need to perform the following to obtain evidence about existing legal encumbrances include: 1. Inquiry with property, plant and equipment custodians 2. Review of minutes of meetings 3. Review of items noted during property, plant and equipment inventory observations 4. Confirmation of the client's liabilities 5. Reading and reviewing lease agreements 6. Reading and reviewing property, plant and equipment purchase contracts and agreements The above procedures aim to assess whether encumbrances and liens to the property, plant and equipment have been identified and whether property currently pledged as collateral on a loan has not been sold or damaged. Q8: The client wants to know if you will be present at the year-end inventory. What is your decision and why? What role or actions will you take at the inventory if you decide to attend the inventory? Why? Solution: The presence of the audit team during the year-end inventory taking is necessary. The representation of the audit team provides assurance that the physical count was carried out carefully and systematically by persons fully informed of the duties involved. Thus, the auditor's responsibility is to ascertain whether the client's employees are carrying out their instructions properly during the count. During the count, the auditor needs to test the efficiency of the counting by arranging for a count or a recount of selected items in the audit team's presence. Moreover, the auditor will be taking notes considered necessary to be followed up. These can include details of items of inventory selected so that the particulars may be checked to the final count sheets; lists of items actually counted in the auditor's presence; details of any inventory noted by the auditor as being obviously defective, damaged or slow-moving; and details of instances where the client's physical count procedures were not carried out. Q9: Considering the general six functions that make up the inventory and warehousing cycle for Smackey Dog Foods, Inc., identify the related documents and/or records that would be used. From your analysis of the internal controls related to the inventory and warehousing cycle of Smackey Dog Foods, Inc., what internal control weaknesses exist? Solution: The six general functions that make up the client's inventory and warehousing cycle are: 1. Processing of purchase orders - purchase requisitions, quotations from suppliers, and purchase orders 2. Receipt of purchased materials - receiving report 3. Storage of materials or inventory - materials requisition form 4. Processing raw materials - job cost sheet, process cost sheets 5. Storage of finished goods - sales invoice, sales order form. 6. Shipping finished goods - shipping form and invoices. Internal control weaknesses observed as regards Smackey's inventory and warehousing cycles are: 1. No procedures for the receipt, storage and disposal of returned dog foods. 2. Processing purchase orders, receipt of purchased materials, storage of raw materials and finished goods, particularly the documents supporting these functions, are handled by a single person. Breaches in internal control in this case are very high. Q10: Discuss if Keller CPAs or its auditors are breaching any Professional Rules of Conduct and why or why not? Solution: Yes, unfortunately the members of the audit team assigned to Smackey's are breaching any Professional Rules of Conduct. One violation is under confidentiality. In the case, Pete, a member of the audit team, has been discussing details of the audit to Alan over few beers. Ethical conduct and principles require that auditors maintain integrity in performing all responsibilities as regards the audit with the highest sense of integrity. Not disclosing and discussing details of the audit with people not members of the audit team is part of this responsibility. Q11: Discuss the CPA firm's legal liability concerns for this audit if they make a material unintentional or intentional mistake. Include any other legal liability concerns regarding possible Professional Rule violations. Solution: The audit profession agrees that the failure of an audit to uncover material misstatements which then resulted to the issuance of an incorrect audit opinion makes the auditor's discharge of his audit responsibility and services questionable, particularly on whether such were exercised with due care. However, how the auditor performed his responsibility as regards the audit and the extent of the damage incurred by third parties relying on the financial statements will determine his legal liability