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Mini Audit Project 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 team's 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 balance recorded 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 an audit report (dated 2/21/2017) assuming that: 1. The client made the suggest adjusting entry. 2. The client did not do the adjusting entry (only if different from the above one). 5. Complete the project by having all of the required workpapers with a cover page that has your group number and names of the group members, in one word document, and drop it in the drop box on D2L by the midnight of Wednesday 4/19/2017. No late assignment will be accepted. Notes: 1. Comparative income statements and balance sheets are provided. 2. Make sure to initial every document. [If you are from the morning (evening) class group # 1, your initial will be MG1 (EG1)]. 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, WP 3-1 XYZ Corp. Ratio Analysis 12/31/2016 Liquidity Ratios: Current ratio current assets / current liabilities Quick ratio (current assets - inventory) / current liabilities Number of days sales in A/R 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 2016 2015 WP 3-2 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 concern: 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 (e.g., income, revenue, assets) $ (put the name of the base here) WP 25-1 Percentage Applied % Preliminary materiality $ (rounded) XYZ Corp. Accounts Receivable Lead sheet Account name and Number 100-101 Accounts receivable Unadjusted Balance ?? Adjustments ?? Conclusions: The accounts receivable account is ????? (fairly on NOT fairly stated) WP 25-2 Adjusted Balance ?? XYZ Corp. Calculation of Sample Size 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 = $26,388,000 (150 accounts) = $ 17,462,207 (20 accounts) = $8,925,793 = $393,000 = ?? = ?? accounts (round up) = ?? accounts [*Sample size = confidence factor / (Performance materiality / Population value)] Hint: population value in the equation above is the population value that you selected a sample from. WP 25-5 XYZ Corp. Adjusting Entries Account Dr. Cr. XYZ Corporation ANNUAL BALANCE SHEET ($ thousands) 12/31/16 ASSETS Cash & Equivalents Net Receivables Inventories Prepaid Expenses Other Current Assets -----------------Total Current Assets Gross Plant Property & Equipment Accumulated Depreciation -----------------Net Plant Property & Equipment Investments at Equity Other Investments Intangibles Deferred Charges Other Assets -----------------TOTAL ASSETS LIABILITIES Long Term Debt Due In One Year Notes Payable Accounts Payable Taxes Payable Accrued Expenses Other Current Liabilities -----------------Total Current Liabilities Long Term Debt Deferred Taxes Investment Tax Credit Other Liabilities -----------------TOTAL LIABILITES Redeemable Noncontrolling Int. EQUITY Preferred Stock - Redeemable Preferred Stock - Nonredeemable -----------------Total Preferred Stock 12/31/15 12/31/14 24991 26388 13764 0 12864 -----------------78007 63750 12349 -----------------51401 9201 18500 5947 0 31464 -----------------194520 29514 25606 13642 0 14908 -----------------83670 44078 9275 -----------------34803 8350 16006 6410 0 28438 -----------------177677 30240 22813 14039 0 14409 -----------------81501 36679 7429 -----------------29250 8094 14354 7228 0 25917 -----------------166344 0 19562 24062 0 5865 21977 -----------------71466 43549 0 0 39182 -----------------154197 0 0 14988 22529 0 5726 22458 -----------------65701 31853 0 0 44099 -----------------141653 0 0 14158 23621 0 4844 19789 -----------------62412 22025 0 0 38733 -----------------123170 0 0 0 -----------------0 0 0 -----------------0 0 3109 -----------------3109 Common Stock Capital Surplus Retained Earnings Less: Treasury Stock -----------------Common Equity -----------------Stockholder's Equity - Parent Nonredeemable Noncontrolling Int. -----------------Stockholder's Equity - Total -----------------TOTAL LIABILITIES & EQUITY COMMON SHARES OUTSTANDING 15 27607 12249 0 -----------------39871 -----------------39871 452 -----------------40323 -----------------194520 1500 16 28937 6504 0 -----------------35457 -----------------35457 567 -----------------36024 -----------------177677 1600 15 28780 10703 0 -----------------39498 -----------------42607 567 -----------------43174 -----------------166344 1500 21/31/2013 28096 14439 14714 0 12747 -----------------69996 31662 5817 -----------------25845 6883 6954 8782 0 30962 -----------------149422 4629 889 25166 0 5063 18245 -----------------53992 10532 603 0 47295 -----------------112422 0 0 10391 -----------------10391 14 23834 2005 0 -----------------25853 -----------------36244 756 -----------------37000 -----------------149422 1366.374 XYZ Corporations ANNUAL INCOME STATEMENT ($ Thous EXCEPT PER SHARE) 12/31/16 Sales Cost of Goods Sold -----------------Gross Profit Selling, General & Administrative Expense -----------------Operating Income Before Deprec. Depreciation, Depletion & Amortization -----------------Operating Profit Interest Expense Non-Operating Income/Expense Special Items -----------------Pretax Income Total Income Taxes -----------------Income Before Extraordinary Items and Noncontrolling Interests Noncontrolling Interest - Inc Acc -----------------Income Before Extraordinary Items & Discontinued Operations Preferred Dividends -----------------Available for Common Savings Due to Common Stock Equivalents -----------------Adjusted Available for Common Extraordinary Items Discontinued Operations -----------------Adjusted Net Income Income to Company Incl Extraordinary Items & Disc Ops Earnings Per Share Basic Excluding Extra Items & Disc Op 12/31/15 12/31/14 152356 123800 -----------------28556 155929 131657 -----------------24272 155427 130909 -----------------24518 11530 -----------------17026 11756 -----------------12516 11910 -----------------12608 7219 -----------------9807 2160 2914 -2843 -----------------7718 -1897 ------------------ 6238 -----------------6278 1899 2987 -3120 -----------------4246 228 ------------------ 5908 -----------------6700 1130 2297 -409 -----------------7458 2127 ------------------ 9615 -72 ------------------ 4018 69 ------------------ 5331 -15 ------------------ 9687 0 -----------------9687 3949 1145 -----------------2804 5346 1576 -----------------3770 0 0 -----------------2804 0 0 -----------------2804 0 -----------------3770 0 0 -----------------3770 -----------------9687 0 0 -----------------9687 9615 4018 5331 6.11 1.75 2.71 Earnings Per Share Basic Including Extra Items & Disc Op Earnings Per Share DilutedExcluding Extra Items & Disc Op Earnings Per Share Diluted Including Extra Items & Disc Op EPS Basic from Operations EPS Diluted from Ops Dividends Per Share Com Shares for Basic EPS Com Shares for Diluted EPS 6.11 1.75 2.71 5.91 1.65 2.38 5.91 5.01 4.87 1.38 1586 1640 1.65 3.06 2.9 1.2 1605 1687 2.38 2.88 2.52 0 1393 1676 EXCEPT PER SHARE) 21/31/2013 ------------------ ------------------ 152256 132229 -----------------20027 13593 -----------------6434 ------------------ 5888 -----------------546 889 2958 -31310 ------------------28695 -34831 ------------------ ------------------ 6136 -52 ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ 6188 859 -----------------5329 -470 -----------------4859 0 0 -----------------4859 6136 3.1 3.1 2.92 2.92 0.23 0.23 0 1566 1675