Hello,

Please see attached 4 documents.

> Memo Template that explains what to do for the assignment and the article to read

> Excel spreadsheet that shows the balance sheet, trial balance, etc... tabs that you should refer to in answering the questions

> My draft of answers which I am not sure if is correct. Please use and add or change to make it correct.

The professors instructions are the following:

The Program tab of the spreadsheet is a mini audit program and it contains the instructions on how to document the results of each step. Steps B.2 and B.3.2 are document in the Word document I gave you. Step B.3.1.1. is only documented if you find a difference when you refoot the trial balance with the Excel sum function, which you add to the trail balance tab. Step B.3.1.2 is documented with tic marks in the Balance Sheet tab of the spreadsheet file.

Please update the word memo template and spreadsheet. Thank you.

Running SOUTH WEST AUDIT ANALYSIS South West Audit Analysis Melissa Sierra University of Maryland, University College 1 Running head: SOUTH WEST AUDIT ANALYSIS 2 South West Audit Analysis Introduction Corporate Structure The company is located in a single warehouse while the offices are located next to the railway station siding. The warehouse workers unload the rail consignments with forklifts and flat lorries used to deliver the goods to the warehouses. Virtually, the sales are based on the customer pickup basis, the present location allows the corporation to reduce the expenses. Moreover, the organization is incorporated at the same state with the office location. The organization has 300 stockiest seven tough it does not publicly trade. Ostensibly, the company offers audited financial reports to financing institutions when they require loans for the past five years. Audit Analysis The corporation specializes in the supply of high quality household appliances in residential construction contractors in large cosmopolitan areas. Additionally, the organization has an outsized number of customers, predominantly custom builders of single-family households and large builders of single and several family units (Bagshaw & Selwood, 2014). Conversely, Southwest marketing approach is to establish an inventory accessible every time with competitive selling prices. Product cost are analyzed annually and adjust the prices of the products where needed. Traditionally, these amendments are based on the company's evaluation of what the competitors offer and the provisions required to offer competitive profits for the owners Due to the slow economic recovery and the global recession, the company has been affected tremendously over the past three years, however it is showing some signs of recovery. 2 Running head: SOUTH WEST AUDIT ANALYSIS 3 Initially, the industry gross sales was growing at a rate of 7% annually (with the normal wide variations from year to year due to the changes in the uptown housing starts. AT the time of recession, the annual sales declined by 15%. Nevertheless, real growth rates started to increase by 2% in the present year. This trend is stipulated to remain the same in the next three to five years. Inherent Risk This audit has integrated four close expanses of theoretical and empirical studies as far as consumer behavior is concerned. Every area is briefly reviewed in this segment. Perceived risk: John and Sons (2015) recommended that many organizations and consumers could be highly perceived to be risk-takers. In essence, organizations and consumers takes risks in purchasing situations due to the probable negative consequences that arise due to buying. Consequently, this perceived risk has become essential in the consumer behavior concepts and models (Bagshaw & Selwood, 2014). Organization Information Processing: The torrent of analysis in this audit report is on South West Appliances Inc information processing. Ideally, this theory assumes that individuals deal with information enthusiastically, logically, and selectively. Mutually John (2013) and Wiley (2015) proposed that if confronted with enormous data, the customer will reduce the amount of information applied in making decisions. Preliminary Analytical Procedures Reasons for Audit Planning 1. 2. 3. Achieve maximum competent substantiation Keep a reasonable audit cost Avoid confrontations with the client. The steps involved in audit planning were: 3 Running head: SOUTH WEST AUDIT ANALYSIS 4 Initial audit planning: This entails, understanding the client's integrity where the client works. Precisely, the risk should be analyzed against the auditor's edge. Recognize the client's need for an audit. Understanding the client's business by establishing the objectives and strategies, external and internal environment, business operation and procedures, evaluation and performances. Assessing the level of risk Perform an initial analytical evaluation Set an acceptable audit risk and inherent risk Set an internal control and risk control assessment. Asses the level of fraud Develop an overall audit and program and plan. Balance Sheet Verification Audit of Current Assets Cash and Bank Balance Audit Examination of the bank statement together with the physical existence in the cash book as well as bank reconciliation, in this report they both reconcile at $22,045 Accounts Receivable Audit Both the account receivables and bad debts provision complied with the audit report procedures. Fixed Assets Audit The amount of depreciation reported in the account statement is not the same as the one reported in the balance sheet. Liabilities Audit 4 Running head: SOUTH WEST AUDIT ANALYSIS 5 The probability of the corporation to be insolvent seems be null, the accounts payable, bank loan, remaining liabilities are all recorded in the books of accounts. There is no difference in the two so there is no probability of making fraud. Analytical Procedure The institution needs to perform a depreciation test on all assets based on the average life and apply the reasonable tests. Reasonable estimates should be established based on the averages, Corroborating procedures: A comprehensive comparison of the accounts balances and ratio analysis, asses other methods and test the balances. The gross profit should be computed using product line. Quantity Reconciliation: The sales units' times the price should be applied to predict the level of sales volume, salaries, wages, and expenses. Reference Bagshaw, K., & Selwood, J. (2014). Core Auditing Standards for Practitioners. 5 Southwest Appliances, Inc. Partial Audit Program Step B.2 WP Ref. Initials Description Company Overview - Review the description of Southwest Appliances, Inc. attached to the assignment. Use the Risk and Materiality Memo Word file to document items you feel are relevant to an inherent risk assessment. I have listed one potential inherent risk area as an example. List four additional inherent risk related items you identified under the Step B.2 section of the Word document. For each inherent risk, describe the feature of the firm you believe affects inherent risk and explain how and why. By "how," I mean whether in increases or decreases inherent risk. Make sure your "why" addresses a specific risk to the accuracy of the financial statements and whether audit effort should be increased of decreased for specific accounts or related groups of accounts if possible. Date B.2.1 MS. ### B.3. Preliminary Analytical Procedures B.3.1 Verify Balance Sheet B.3.1.1 Foot the trial balance - using the Sum function in Excel, verify that the totals shown on the Trail Balance are accurate and note any discrepancies in the Comments section of WP B.3.1.2 (Balance Sheet tab). B.3.1.2. MS. ### Vouch Balance Sheet line items to the Trial Balance - vouch each line item on the Balance Sheet to the Trial Balance and note any discrepancies in the Comments section of WP B.3.1.2 (Balance Sheet tab). Use the tick mark legend on the working paper and enter your tick marks in the CK column for each account on the Balance Sheet. B.3.1.2. MS. ### B.2.1 MS. ### B.3.1.2 B.3.2 Perform Analytical Procedures - Review Southwest Appliances financial statements, ratios, and industrial presented in the this spreadsheet file. Identify four accounts that you believe need additional audit scrutiny and explain why. Document your results in the Inherent Risk and Materiality Memo. For this step, do not restate any issues you noted in B.3.1.2 since those have already been identified. When doing your analytical procedures, keep in mind that isolated changes in one account of ratio are rarely very informative and so you need also to look at changes or difference from the industry in related statistics as well. WP B.3.1.2 Initials Date Southwest Appliances, Inc. Balance Sheets (Amounts in Dollars) 19X0 Current Assets Cash and cash equivalents Money market funds Accounts receivable Allowance for doubtful accounts Inventory Total Current Assets Prepared Reviewed 19X0 % of 19X1 % of Assets Assets % Change 19X1 Assets CK $ 22,045 $ 31,510 301,713 (31,916) 307,701 631,053 10,867 16,000 395,755 (33,779) 503,091 891,934 2.18 3.12 29.90 (3.16) 30.49 62.54 0.89 1.31 32.28 (2.76) 41.04 72.76 (50.71) (49.22) 31.17 (5.84) 63.50 41.34 Property and Equipment Plant 500,000 500,000 Accumulated depreciation - plant (220,000) (240,000) Equipment 120,000 120,000 Accumulated depreciation - equip (72,000) (96,000) Land 50,000 50,000 Net Property and Equipment 378,000 334,000 Total Assets $ 1,009,053 $ 1,225,934 49.55 (21.80) 11.89 (7.14) 4.96 37.46 100.00 40.79 (19.58) 9.79 (7.83) 4.08 27.24 100.00 (33.33) (11.64) 21.49 (9.09) Liabilities and Stockholders' Equity Current Liabilities Accounts payable Payroll taxes payable Income taxes payable Dividends payable Total Current Liabilities Notes payable Total Long-term Liabilities Stockholders' Equity Capital stock Paid-in capital Retained earnings Total Stockholders' Equity Total Liabilities and Equity Tick Mark Legend Agrees Exception Comments 145,031 8,524 30,235 14,197 197,987 387,757 17,436 4,125 3,203 412,521 14.37 0.84 3.00 1.41 19.62 31.63 1.42 0.34 0.26 33.65 167.36 104.55 (86.36) (77.44) 108.36 90,000 90,000 60,000 60,000 8.92 8.92 4.89 4.89 (33.33) (33.33) 300,000 300,000 100,000 100,000 321,066 353,413 721,066 753,413 $ 1,009,053 $ 1,225,934 29.73 9.91 31.82 71.46 100.00 24.47 8.16 28.83 61.46 100.00 10.07 4.49 21.49 y n Southwest Appliances, Inc. Income Statements Initials Prepared Reviewed (Amounts in Dollars) Sales Sales discounts Sales returns Bad debt expenses Net Sales 19X0 19X1 $ 2,736,561 $ 3,277,873 (8,371) (9,207) (33,809) (51,559) (27,565) (33,078) 2,666,816 3,184,029 Cost of goods sold Gross profit $ $ 78.90 18.56 79.37 17.77 20.50 14.69 290,400 21,199 16,081 7,140 25,673 6,456 3,650 1,140 5,100 11,500 1,225 53,815 12,164 44,000 499,543 82,840 9.47 0.67 0.52 0.24 0.80 0.22 0.11 0.04 0.17 0.42 0.04 1.55 0.34 1.61 16.20 2.36 8.86 0.65 0.49 0.22 0.78 0.20 0.11 0.03 0.16 0.35 0.04 1.64 0.37 1.34 15.24 2.53 12.00 15.00 12.01 10.00 17.00 4.99 19.01 17.04 10.01 1.00 25.00 27.00 32.00 12.69 28.47 22,864 87,345 $ 2,601,646 582,383 259,287 18,434 14,357 6,491 21,943 6,149 3,067 974 4,636 11,386 980 42,374 9,215 44,000 443,293 64,481 Interest revenue Income before income taxes Beginning retained earnings Net income Dividends Ending retained earnings 19X0 % of 19X1 % of Sales Sales % Change 100.00 100.00 19.78 (0.31) (0.28) (9.99) (1.24) (1.57) (52.50) (1.01) (1.01) (20.00) 97.45 97.14 19.39 2,159,042 507,774 Salaries expense Payroll tax expense Fringe benefits Rent Utilities Insurance Supplies expense Postage expense Advertising expense Professional fees Miscellaneous Purchase discounts lost Interest expense Depreciation expense Total operating expenses Operating Income Income taxes Net Income Date 28,580 111,420 0.84 3.19 0.87 3.40 25.00 27.56 25,114 62,231 $ 37,508 73,912 0.92 2.27 1.14 2.25 49.35 18.77 271,728 $ 62,231 12,893 321,066 $ 321,066 73,912 41,565 353,413 Southwest Appliances, Inc. Statement of Cash Flows (Amounts in Dollars) 19X1 Operating cash flows Net income Depreciation Allowance for doubtful accounts $ 19X1 % of Sales 73,912 44,000 1,863 2.25 1.34 0.06 (94,042) (195,390) 242,726 8,912 (26,110) (10,994) 44,877 (2.87) (5.96) 7.40 0.27 (0.80) (0.34) 1.37 15,510 15,510 0.47 0.47 Financing cash flows Repayment of notes payable Dividends Financing cash flows (30,000) (41,565) (71,565) (0.92) (1.27) (2.18) Net cash flow Beginning cash Ending cash (11,178) 22,045 10,867 Changes in working capital (Increase) in accounts receivable (Increase) in inventory Increase in accounts payable Increase in payroll taxes payable (Decrease) in income taxes payable (Decrease) in dividends payable Cash flow from operations Investing cash flows Money market funds Investing cash flows $ Southwest Appliances, Inc. Ratios (Amounts in Dollars) 19X0 19X1 Operating Performance Overall Performance Return on Assets Return on Equity Asset Turnover 6.2% 8.6% 2.7 6.0% 9.8% 2.7 Cash Conversion Cycle Days cash in receivables Days cash in inventories Days needs Days cash in payables and accrued liabilities Net conversion cycle 40.2 52.0 92.3 23.0 69.3 44.1 70.6 114.6 50.8 63.9 3.19 1.63 2.16 0.94 92.6% 0.40 0.12 0.63 0.08 Financial Position Short-term Current Ratio Quick Ratio Dividend payout Long-term Total debt to equity Long-term debt to equity Southwest Appliances, Inc. Trail Balance as of X1/12/31 1000 1001 1005 1010 2000 2050 2500 3000 3050 3100 3150 3900 4000 4100 4200 4300 4400 4500 5000 5100 5200 9999 CASH PETTY CASH PAYROLL IMPRESSED CASH MONEY MARKET FUNDS ACCOUNTS RECEIVABLE ALLOW FOR DOUBTFUL ACCOUNTS INVENTORY PLANT ACCUM. DEPRECIATION (PLANT) EQUIPMENT ACCUM. DEPRECIATION (EQUIPMENT) LAND ACCOUNTS PAYABLE SHORT TERM LOANS PAYABLE PAYROLL TAXES PAYABLE INCOME TAXES PAYABLE DIVIDENDS PAYABLE NOTES PAYABLE CAPITAL STOCK PAID-IN CAPITAL RETAINED EARNINGS GRAND TOTAL $ $ 10,666.71 200.00 $ $ 16,000.00 398,139.96 $ $ 240,000.00 $ $ $ 33,778.68 96,000.00 $ $ $ $ $ $ $ $ $ 387,756.84 17,436.00 4,936.07 3,833.05 60,000.00 300,000.00 100,000.00 354,357.03 ### 503,091.00 500,000.00 $ 120,000.00 $ 50,000.00 $ $ 1,598,097.67 Wholesale Heating and AC Industry Comparative Common-sized Balance Sheet CASH AND EQUIVALENTS ACCOUNTS RECEIVABLE (NET) INVENTORY OTHER CURRENT TOTAL CURRENT ASSETS 12/31/X0 121/31X1 % of Assets % of Assets 5.00 4.50 35.00 37.00 40.00 39.00 1.50 1.40 81.50 81.90 FIXED ASSETS (NET) INTANGIBLES (NET) TOTAL NON CURRENT ASSETS TOTAL ASSETS 17.50 1.00 18.50 100.00 17.00 1.10 18.10 100.00 ACCOUNTS PAYABLE SHORT TERM LOANS PAYABLE INCOME TAXES PAYABLE OTHER CURRENT TOTAL CURRENT LIABILITIES 28.50 13.50 2.00 1.40 45.40 30.50 14.00 2.20 1.30 48.00 LONG-TERM DEBT NET WORTH TOTAL LIAB. AND NET WORTH 8.90 45.70 100.00 8.50 43.50 100.00 Comparative Common-sized Income Statement NET SALES COST OF GOODS SOLD GROSS MARGIN 100.0 79.0 21.0 16.5 4.5 TOTAL EXPENSES INCOME BEFORE TAXES 100.0 79.5 20.5 17.0 3.5 1.4 6.2% 13.6% 1.8 0.9 1.2 0.2 1.7 5.9% 13.6% 1.7 0.9 1.3 0.2 Comparative Ratios ASSET TURNOVER RETURN ON ASSETS RETURN ON EQUITY CURRENT RATIO QUICK RATIO TOTAL DEBT TO EQUITY LONG-TERM DEBT TO EQUITY Instructions All the tasks and results use the "SW Working paper Template" Excel file and the "SW Risk Memo template" Word file. Complete the audit steps listed in Section B.2, B.3, and B.4. in the audit program presented in the spreadsheet file. Document your work as required in these steps. Rename the spreadsheet file with your own name (e.g., "Jim Peters SW.xls) and the Risk Memo (e.g., Jim Peters SW.doc) and attach to your assignment as your solutions to this week's homework assignment. The description of Southwest Appliance is attached to the end of this document. It contains the information on which you are to base your answers to the assignment except for their financial data. Southwest's financial statements and data are included in the "SW Working paper Template" file. Clearly, this is an incomplete audit program. I have selected isolated steps to test your abilities on several common audit tasks related to initial audit planning and risk assessment. This is an individual assignment. Please refer to the statement on academic integrity in the course syllabus about what constitutes cheating on this assignment. Tasks Note - The working paper you will use for this assignment contains headings as well as action items. Only the items with working paper references next to them are action items you need to perform for this assignment. Also, in all cases, you are the preparer of the working paper, not the reviewer, and you cannot review your own work. I included the reviewer's section simple to provide a little more realism to the working papers. a) Perform the step in Section B.2 of the partial audit program in the Southwest Appliances spreadsheet file. Initial and date the step on the program when you complete it by entering your initials and the date into the appropriate cells in the Program worksheet. Also, initial and date any supporting working papers you used. b) Perform the steps in Section B.3 of the partial audit program in the Southwest Appliances spreadsheet file. Initial and date each step on the program as you complete it by entering your initials and the date into the appropriate cells in the Program worksheet. Also, initial and date any supporting working papers you used. 1 Description of Southwest Appliance, Inc. History and Corporate Structure Southwest Appliances, Inc. specializes in supplying a relatively small line of high quality household appliances to residential construction contractors in a large and growing metropolitan area. Southwest has a large list of customers, mostly custom builders of single family dwellings and some large builders of single and multiple family units. Southwest basic marketing strategy is to have inventory available at all times and to sell at competitive prices. At the end of every quarter, the President, Joe Navarro, reviews product costs and adjusts the authorized selling prices of products as necessary. These adjustments are based on Mr Navarro's assessment of what the competition will do as well as what is required to provide competitive profits to the owners. The wholesale appliance industry has been affected by a global recession and by a slow economic recovery for the last three years, but is showing signs of recovery. Prior to the recession, the industry's gross sales were growing at a real rate of about 7% per year (with the usual wide variations from year to year due to fluctuations in the residential housing starts). During the recession, their sales fell by 15%. However, real growth rates for the industry are starting to increase to about 2% in the current year. Southwest management expects future growth in the industry to be around the same level for the next three to five years. Mr. Navarro's market strategy does not seem to be very effected because prior to year X1, Southwest's sales have not grown as fast as the industry in recent years and fell more than the industry during the recession. Southwest's facilities are located in a single warehouse and office building adjacent to a railroad siding. Warehouse personnel simply unload rail deliveries with the forklifts and flat trucks that are used to handle inventory inside the warehouse. Because sales are made on a customer pickup basis, this location allows the company to avoid the expense of maintaining its own vehicles for transportation in and out. However, Southwest does have an arrangement with the trucking business next door to handle additional deliveries for customers on a freight collect basis (i.e., FOB shipping point). In the cases of customer pickup and the occasional delivery, sales are considered final when the appliances leave Southwest's loading dock. Southwest is incorporated in the same state in which its home office is located. It does business in its home state and three surrounding states. The company's stock is held by almost 300 individuals and businesses, but is not yet publicly traded. Currently, Southwest's top management holds over 50% of the stock. The Board wants to expand their business and is anticipating going public with an initial public offering (IPO) within the next year. Executing an IPO will require that the Board make public their historic financial statements and have them auditing as part of the IPO prospectus to potential investors. Southwest currently provides audited financial statements to banks when requesting loans and, therefore, has had audits for each of the last five years. Because Southwest is small, their local bank insisted that restrictive covenants be added to the firm's last loan agreement. These covenants require that the loan be repaid immediately in full if Southwest's current and debt to 2 equity ratios fall below specified levels. The covenants also set limits on how much the firm can pay in dividends if they are violated. To help stimulate sales Southwest recently instituted a profit sharing bonus agreement for its employees. This plan was negotiated because employees have gone without raises for the last two years due to the recession. The agreement specifies that employee bonuses will be based on unaudited net income for the past year because of the need to adjust employees' salaries at the beginning of each year. However, future bonuses are adjusted for any audit adjustments that are made after the bonuses are set based on unaudited data. No accrual has been made for the current year. Individual bonuses are to be based on an employee's position, length of service, and certain specific negotiated terms with individual officers. They will therefore vary in amount, but generally, the bonuses will average about 15% of the base net income. Southwest's Board of Directors includes their current president, secretary/treasurer, and controller. It also includes two shareholders, who each hold about 5% interest in the firm, and one retired CPA, Jack Washington. While there is no audit committee, the board as a whole takes an active role in hiring and monitoring the firm's outside auditor. It also relies on the leadership of Mr. Washington to determine the scope of the audit engagement. Mr. Washington was recruited to the Board last year to help compensate for the fact that the prior president and controller retired during the new year and, therefore, the current president and controller have been in their positions for less than one year. The new controller was promoted from within, but the new president was recruited from outside the firm. Southwest selected a new auditor for this year's audit engagement because their previous auditor had been with them for ten years and the Board felt it was time to get new insights into their operations. In addition, they wanted to hire a larger auditor with a more established reputation to support their anticipated IPO. Control Structure Southwest's accountant, Bob Smith, prepares financial statements and various financial statistics for the officers to review monthly. The board reviews similar statistics on a quarterly basis at the regular board meetings and questions the officers closely about what is going on the business. In addition, Mr. Navarro personally follows sales figures and gross profit margins. Supervisors interview all perspective employees for positions they supervise. In addition, at least one of the corporate officers also interview each perspective employee. Most of the key employees, including the officers, have been with Southwest for more than ten years. However, due to the high demand for accountants, Bob Smith, and most of the accounting staff, has been with Southwest for less than 3 years. While Southwest does check references for any prospective employee, they do not have the resources to check for criminal records and do other forms of background checks. Southwest's accounting and inventory management are supported by a network are personal computers with units at locations in the offices and warehouse, and a central server to handle all accounting and inventory files. Printers are located in areas in which printed documents and other records are needed routinely. The computer is used to control and process most transactions, to print documents, prepare accounting records, and prepare periodic financial 3 statements. Southwest uses commercial software recommended by their auditor. To date, they have had only the usual startup problems (the system has been in use two years and has been upgraded once). Only employees with jobs requiring computer data entry or access to file information and reports are given accounts and passwords. Passwords are required to enter the system and access is keyed to individual accounts such that employees only have access to the information they need to perform their duties. Normal access to the files takes place via the software, which subjects any input to various logical and numerical tests. Most input is backed up by paper trails of source documents and other business papers. Southwest has a complete set of policies and procedures manuals that employees are required to use. Management is aggressive about keeping them up to date and insuring that new employees are properly trained in the policies and procedures that affect their duties. Management also requires employees to attend brief review seminars on the policies and procedures that affect their positions once a year. Summary of Major Personnel and Their Roles Error! Not a valid link. 4