AUDIT CASE:

Your firm, ACTG 307 & Associates, is engaged to audit the financial statements of XYZ Corporation. It is a private manufacturing company that is considering going public in three to four years. Your firm has been preforming audit services to this client for the past five years. The client requires financial statements audits for monitoring purposes, but mainly to receive finance and loans from banks. The management team has high level of competence and integrity, and based on the other teams assessment of internal control, the control risk is low. Another team did most of the audit tests and completed most of the audit workpapers. Your team is assigned to complete the workpapers and audit tests of the engagement. Specifically, your team is required to do the following:

1. Write an engagement letter, dated 11/6/2016, by completing WP 2-1.

2. Perform the preliminary analytical procedure WP 3-1 and 3-2 and comment on:

a. The client liquidity, profitability and solvency.

b. The client ability to continue as a going concern.

3. Assess the preliminary materiality based on the policy provided (WP 1-13), and complete WP 3-5, assuming moderate risk and satisfactory results of the analytical procedures.

4. Complete the audit of the accounts receivables:

a. Calculate the sample size for A/R confirmation by following steps in WP 25-2.

b. Assume that you received answers for all of the confirmations and only one of them indicated that the balance is wrong. The recorded balance is $598,000, but the correct amount is $589,000. Prepare an adjusting entry on WP 25-5.

c. Complete the A/R lead sheet WP 25-1, and complete the conclusions box by stating whether this account is fairly stated or not. (Ignore the allowance for doubtful accounts).

d. Assuming that all other tests came to be satisfactory, prepare audit reports (dated 2/21/2017) assuming that:

1. The client made the suggest adjusting entry.

2. The client did not do the adjusting entry and the misstatement is material.

3. The client did not do the adjusting entry and the misstatement is highly material.

Income Statement:

Balance Sheet:

XYZ Corporations ANNUAL INCOME STATEMENT $ Thou EXCEPT PER SHARE) 12/3116 12/3155 12/31/14 21312013 Saks Cost of Goods Sold 152356 123800 155929 131657 155427 130309 152256 132223 28556 24212 24518 20027 Gross Profit Selling. General Administrative Experise 11530 11756 11910 13583 17026 12516 12608 6434 Operating Income Before Deprec. Depreciation, Depletion & Amortization 7219 6238 5308 5888 S807 6700 Operating Profit Interest Expense Non-Operating Income/Expense Special items 2160 2914 2987 889 2958 -31310 2297 -409 -2843 7458 Pretax income Total Income Taxes -28695 -34831 -1897 228 2127 Income Before Extraordinary Items und Noncontrolling Interests Noncontrolling Interest - Inc Acc 4018 5331 6136 -15 Income Before Extraordinary Items & Discontinued Operations Preferred Dividends 9687 3949 5346 6188 1145 1576 3687 2804 3770 5329 Available for Common Savinge Due to Common Stock Equivalents -470 3687 2804 3770 4859 Adjusted Available for Common Extraordinary Items Discontinued Operations 3687 2804 3770 4859 Adivated Net Income Income to Company Incl Extraordinary Items & Disc Ops 3615 4018 5331 Earnings Per Share Basic Excluding Extra Items & Disc Op Earnings Per Share Basic - Including Extra items & Disc Op Earnings Per Share Diluted- Excluding Extra Items & Disc Op Earnings Per Share Diluted Including Extra Items & Disc Op EPS Basic from Operations EPS Diluted from Ops Dividende Per Share Com Shares for Basic EPS Com Sharep for Diluted EPS 5.31 3.06 5.01 4.87 138 2.9 1605 0 1566 1675 1640 1687 XYZ Corporation ANNUAL BALANCE SHEET (5 thousands) 12/31/16 12/31/15 12/31/14 21/31/2013 ASSETS 1 Cash & Equivalents Not Receivables Inventories Prepaid Expenses Other Current Assets 24991 26388 13764 29514 25606 136-42 30240 22813 14039 28036 14439 14714 12864 14908 14.409 Total Current Assets Gross Plant Property & Equipment Accumulated Depreciation 78007 63750 12349 83670 44078 9275 81501 36679 63396 31662 51401 9201 18500 5947 34803 8350 Net Plant Property & Equipment Investment ut Equity Other Investments Intangibles Deferred Charges Other Assets 29250 8094 14354 7228 25845 6883 6954 8782 16006 31464 28438 25917 30962 194520 177677 166344 143422 TOTAL ASSETS LIABILITIES Long Term Debt Due In One Year Notes Payable Accounts Payable Taxes Payable Accrued Expenses Other Current Liabilities 19562 24062 14388 22529 14158 23621 4629 889 25166 5865 5726 22458 4844 19789 5063 18245 21977 71466 43549 65701 31853 62412 22025 Total Current Liabilities Long Term Debt Deferred Taxes Investment Tax Credit Other Liabilities 53992 10532 603 39182 44099 38733 47295 154197 141653 123170 112422 TOTAL LIABILITES Redeemable Noncontrolling Int. EQUITY Preferred Stock - Redeemable Preferred Stock. Nonredeemable 3109 10391 3109 10391 Total Preferred Stock Common Stock Capital Surplus Retained Earnings Less: Treasury Stock 28937 27607 12249 6504 28780 10703 23.834 2005 Common Equity 33871 35457 39498 33871 35457 42607 Stockholder's Equity - Parcat Nonredeemable Noncontrolling Int. Stockholder's Equity - Total 40323 36024 43174 37000 TOTAL LIABILITIES & EQUITY COMMON SHARES OUTSTANDING 194520 1500 177677 1600 166344 1500 149422 1366.4 WP 1-13 ACTG 307 & ASSOCIATES, CPAS POLICY STATEMENT Professional judgment is to be used at all times in setting and applying materiality guidelines. As a general guideline, the following policies are to be applied: 1. The combined total of misstatements in the financial statements exceeding 10 percent is normally considered material, less than 5 percent is presumed to be immaterial in the absence of qualitative factors. Between 5 percent and 10 percent require the greatest amount of professional judgment to determine their materiality. 2. The 5 percent to 10 percent must be measured in relation to the appropriate base. Many times there is more than one base to which misstatements should be compared. The following guides are recommended in selecting the appropriate base: a. Income statement. Combined misstatements in the income statement should ordinarily be measured at 5 percent to 10 percent of operating income before taxes. A guideline of 5 percent to 10 percent may be inappropriate in a year in which income is unusually large or small. b. Balance sheet. Combined misstatements in the balance sheet should originally be evaluated for current assets, current liabilities, and total assets. For current assets and current liabilities, the guidelines should be between 5 percent and 10 percent. For total assets, the guidelines should be between 3 percent and 6 percent. 3. Qualitative factors should be carefully evaluated on all audits. WP 2-1 ACTG 307 & Associates Certified Public Accountant 2500 Michigan Ave. Chicago, IL 60000 Mr. John Smith, Chairman of the Board XYZ Corporation 36 Bryn Mawr St. Chicago, IL 60625 Dear Mr. Smith, XYZ Corp Ratio Analysis 12/31/2016 2016 2015 Liquidity Ratios: Current ratio current assets/ current liabilities Quick ratio (current assets - inventory) / current liabilities Number of days sales in AR net ending receivables / (net sales/365) Inventory turnover cost of sales / average inventory Profitability Ratios: Gross profit margin% gross profit/ net sales Income before tax / owner's equity net income before taxes / owner's equity Income before tax / Total Assets net income before taxes / total assets Sales/Total Assets net sales / total assets Sales / Working Capital net sales/ (current assets - current liabilities) Solvency Ratios: Owner's equity/total assets Owner's equity / total assets Current liability / Owner's equity Current liability / Owner's equity Total liability / Owner's equity Total liability / Owner's equity XYZ Corp Preliminary Analytical Procedures - Conclusions of Ratio Analysis 12/31/2016 Liquidity: Please write your conclusions and comments on the client liquidity ratios here. Profitability: Please write your conclusions and comments on the client profitability ratios here. Solvency: Please write your conclusions and comments on the client Solvency ratios here. Going concer: Please write your conclusions and comments on the client's ability to continue as a going concern based on the above ratio analysis here. WP 3-5 XYZ Corp Preliminary materiality Judgment Measurement base Percentage Applied Preliminary materiality (e.g., income, revenue, assets) (rounded) (put the name of the base here) Calculation of Sample Size Risk of incorrect Acceptance Ratio of Expected to Tolerable Misstatement 5% 10% 15% 20% 25% 30% 35% 50% 0.00 0.70 0.05 1.90 2.06 2.25 1.21 1.29 1.61 1.74 1.89 2.06 2.26 1.39 0.73 0.77 0.82 2.47 0.10 0.15 0.20 0.25 0.30 0.35 3.00 3.31 3.68 4.11 4.63 5.24 6.00 6.92 8.09 9.59 11.54 14.18 17.85 2.31 2.52 2.77 3.07 3.41 3.83 4.33 4.95 5.72 6.71 7.99 9.70 12.07 1.49 1.62 1.76 1.93 1.39 1.49 1.61 1.74 1.90 2.09 2.30 2.57 2.89 3.29 3.80 4.47 5.37 2.73 3.04 3.41 3.86 4.42 5.13 6.04 7.26 8.93 1.05 1.12 1.20 1.28 1.38 1.50 1.63 1.79 1.99 2.22 2.51 2.89 3.38 2.14 0.87 0.92 0.99 1.06 1.14 1.25 0.40 2.77 3.12 3.54 4.07 4.75 5.64 6.86 2.39 0.45 2.70 0.50 1.37 0.55 0.60 3.08 3.58 4.25 1.52 1.70 Source: Data from AICPA Audit Sampling Audit Guide, March 1, 2012 (www.aicpa.org). = $26,388,000 (150 accounts) = $ 17,462,207 (20 accounts) = $8,925,793 Book value of recorded population Book value for individual material accounts (test all of them) Book value for all remaining accounts (test only a sample) Performance materiality Confidence factor (From table above assuming ROIA of 10% and Ratio of expected to material misstatement of 5%) Sample size* Total accounts to be confirmed = $393,000 = ?? = ?? accounts (round up) = ?? accounts [*Sample size = confidence factor / (Performance materiality / Population value] Hint: population value in the equation above is the population value that you selected a sample from. WP 25-3 XYZ Corp. Adjusting Entries Account Cr. XYZ Corporations ANNUAL INCOME STATEMENT $ Thou EXCEPT PER SHARE) 12/3116 12/3155 12/31/14 21312013 Saks Cost of Goods Sold 152356 123800 155929 131657 155427 130309 152256 132223 28556 24212 24518 20027 Gross Profit Selling. General Administrative Experise 11530 11756 11910 13583 17026 12516 12608 6434 Operating Income Before Deprec. Depreciation, Depletion & Amortization 7219 6238 5308 5888 S807 6700 Operating Profit Interest Expense Non-Operating Income/Expense Special items 2160 2914 2987 889 2958 -31310 2297 -409 -2843 7458 Pretax income Total Income Taxes -28695 -34831 -1897 228 2127 Income Before Extraordinary Items und Noncontrolling Interests Noncontrolling Interest - Inc Acc 4018 5331 6136 -15 Income Before Extraordinary Items & Discontinued Operations Preferred Dividends 9687 3949 5346 6188 1145 1576 3687 2804 3770 5329 Available for Common Savinge Due to Common Stock Equivalents -470 3687 2804 3770 4859 Adjusted Available for Common Extraordinary Items Discontinued Operations 3687 2804 3770 4859 Adivated Net Income Income to Company Incl Extraordinary Items & Disc Ops 3615 4018 5331 Earnings Per Share Basic Excluding Extra Items & Disc Op Earnings Per Share Basic - Including Extra items & Disc Op Earnings Per Share Diluted- Excluding Extra Items & Disc Op Earnings Per Share Diluted Including Extra Items & Disc Op EPS Basic from Operations EPS Diluted from Ops Dividende Per Share Com Shares for Basic EPS Com Sharep for Diluted EPS 5.31 3.06 5.01 4.87 138 2.9 1605 0 1566 1675 1640 1687 XYZ Corporation ANNUAL BALANCE SHEET (5 thousands) 12/31/16 12/31/15 12/31/14 21/31/2013 ASSETS 1 Cash & Equivalents Not Receivables Inventories Prepaid Expenses Other Current Assets 24991 26388 13764 29514 25606 136-42 30240 22813 14039 28036 14439 14714 12864 14908 14.409 Total Current Assets Gross Plant Property & Equipment Accumulated Depreciation 78007 63750 12349 83670 44078 9275 81501 36679 63396 31662 51401 9201 18500 5947 34803 8350 Net Plant Property & Equipment Investment ut Equity Other Investments Intangibles Deferred Charges Other Assets 29250 8094 14354 7228 25845 6883 6954 8782 16006 31464 28438 25917 30962 194520 177677 166344 143422 TOTAL ASSETS LIABILITIES Long Term Debt Due In One Year Notes Payable Accounts Payable Taxes Payable Accrued Expenses Other Current Liabilities 19562 24062 14388 22529 14158 23621 4629 889 25166 5865 5726 22458 4844 19789 5063 18245 21977 71466 43549 65701 31853 62412 22025 Total Current Liabilities Long Term Debt Deferred Taxes Investment Tax Credit Other Liabilities 53992 10532 603 39182 44099 38733 47295 154197 141653 123170 112422 TOTAL LIABILITES Redeemable Noncontrolling Int. EQUITY Preferred Stock - Redeemable Preferred Stock. Nonredeemable 3109 10391 3109 10391 Total Preferred Stock Common Stock Capital Surplus Retained Earnings Less: Treasury Stock 28937 27607 12249 6504 28780 10703 23.834 2005 Common Equity 33871 35457 39498 33871 35457 42607 Stockholder's Equity - Parcat Nonredeemable Noncontrolling Int. Stockholder's Equity - Total 40323 36024 43174 37000 TOTAL LIABILITIES & EQUITY COMMON SHARES OUTSTANDING 194520 1500 177677 1600 166344 1500 149422 1366.4 WP 1-13 ACTG 307 & ASSOCIATES, CPAS POLICY STATEMENT Professional judgment is to be used at all times in setting and applying materiality guidelines. As a general guideline, the following policies are to be applied: 1. The combined total of misstatements in the financial statements exceeding 10 percent is normally considered material, less than 5 percent is presumed to be immaterial in the absence of qualitative factors. Between 5 percent and 10 percent require the greatest amount of professional judgment to determine their materiality. 2. The 5 percent to 10 percent must be measured in relation to the appropriate base. Many times there is more than one base to which misstatements should be compared. The following guides are recommended in selecting the appropriate base: a. Income statement. Combined misstatements in the income statement should ordinarily be measured at 5 percent to 10 percent of operating income before taxes. A guideline of 5 percent to 10 percent may be inappropriate in a year in which income is unusually large or small. b. Balance sheet. Combined misstatements in the balance sheet should originally be evaluated for current assets, current liabilities, and total assets. For current assets and current liabilities, the guidelines should be between 5 percent and 10 percent. For total assets, the guidelines should be between 3 percent and 6 percent. 3. Qualitative factors should be carefully evaluated on all audits. WP 2-1 ACTG 307 & Associates Certified Public Accountant 2500 Michigan Ave. Chicago, IL 60000 Mr. John Smith, Chairman of the Board XYZ Corporation 36 Bryn Mawr St. Chicago, IL 60625 Dear Mr. Smith, XYZ Corp Ratio Analysis 12/31/2016 2016 2015 Liquidity Ratios: Current ratio current assets/ current liabilities Quick ratio (current assets - inventory) / current liabilities Number of days sales in AR net ending receivables / (net sales/365) Inventory turnover cost of sales / average inventory Profitability Ratios: Gross profit margin% gross profit/ net sales Income before tax / owner's equity net income before taxes / owner's equity Income before tax / Total Assets net income before taxes / total assets Sales/Total Assets net sales / total assets Sales / Working Capital net sales/ (current assets - current liabilities) Solvency Ratios: Owner's equity/total assets Owner's equity / total assets Current liability / Owner's equity Current liability / Owner's equity Total liability / Owner's equity Total liability / Owner's equity XYZ Corp Preliminary Analytical Procedures - Conclusions of Ratio Analysis 12/31/2016 Liquidity: Please write your conclusions and comments on the client liquidity ratios here. Profitability: Please write your conclusions and comments on the client profitability ratios here. Solvency: Please write your conclusions and comments on the client Solvency ratios here. Going concer: Please write your conclusions and comments on the client's ability to continue as a going concern based on the above ratio analysis here. WP 3-5 XYZ Corp Preliminary materiality Judgment Measurement base Percentage Applied Preliminary materiality (e.g., income, revenue, assets) (rounded) (put the name of the base here) Calculation of Sample Size Risk of incorrect Acceptance Ratio of Expected to Tolerable Misstatement 5% 10% 15% 20% 25% 30% 35% 50% 0.00 0.70 0.05 1.90 2.06 2.25 1.21 1.29 1.61 1.74 1.89 2.06 2.26 1.39 0.73 0.77 0.82 2.47 0.10 0.15 0.20 0.25 0.30 0.35 3.00 3.31 3.68 4.11 4.63 5.24 6.00 6.92 8.09 9.59 11.54 14.18 17.85 2.31 2.52 2.77 3.07 3.41 3.83 4.33 4.95 5.72 6.71 7.99 9.70 12.07 1.49 1.62 1.76 1.93 1.39 1.49 1.61 1.74 1.90 2.09 2.30 2.57 2.89 3.29 3.80 4.47 5.37 2.73 3.04 3.41 3.86 4.42 5.13 6.04 7.26 8.93 1.05 1.12 1.20 1.28 1.38 1.50 1.63 1.79 1.99 2.22 2.51 2.89 3.38 2.14 0.87 0.92 0.99 1.06 1.14 1.25 0.40 2.77 3.12 3.54 4.07 4.75 5.64 6.86 2.39 0.45 2.70 0.50 1.37 0.55 0.60 3.08 3.58 4.25 1.52 1.70 Source: Data from AICPA Audit Sampling Audit Guide, March 1, 2012 (www.aicpa.org). = $26,388,000 (150 accounts) = $ 17,462,207 (20 accounts) = $8,925,793 Book value of recorded population Book value for individual material accounts (test all of them) Book value for all remaining accounts (test only a sample) Performance materiality Confidence factor (From table above assuming ROIA of 10% and Ratio of expected to material misstatement of 5%) Sample size* Total accounts to be confirmed = $393,000 = ?? = ?? accounts (round up) = ?? accounts [*Sample size = confidence factor / (Performance materiality / Population value] Hint: population value in the equation above is the population value that you selected a sample from. WP 25-3 XYZ Corp. Adjusting Entries Account Cr