Interim Audit Findings
A B D E F G H IN 00 1 ABC, Inc. 2 Analytical Review Procedures 3 Year Ended December 31, 2017 It is January 2018 and you are a staff accountant assigned to the 2017 audit of ABC Inc. ABC is a closely held corporation managed by the founder and principal shareholder, Agatha Bernice Christy. Your firm has audited ABC for the last five years. The audited financial statements for the years ended December 31, 2016 4 and 2015 are presented below, with the client's unaudited financial statements for 2017. 5 Additional Information: 6 - ABC manufactures and sells drones for industrial use and cattle prods for ranching. All sales are on credit. Credit terms are net 30 days. 8 - ABC offers a one-year warranty covering manufacturing defects. physical count on December 31. You and your supervisor observed the count on December 31, 2017 and performed numerous test counts, but you have not performed further audit tests 9 regarding inventory. The interest rate on all debt is 8 percent. Annual interest and principal payments are due each 10 December 1. 11 Average Common Shares Outstanding is 10,000 for each year. 12 INCOME STATEMENTS ($000's) 13 Years ended December 31 2017 2015 14 Sales revenue $ 7,750 $ 7,713 $ 7,493 15 Cost of goods sold 5,505 5,381 5,225 16 Gross profit 2.245 2,332 2,268 17 Selling and general expenses 1,631 1,622 1,577 18 Depreciation expense 46 55 49 19 Warranty expense 75 65 55 20 Bad debt expense 90 85 90 21 Legal fees 53 14 12 22 Interest expense 110 127 135 23 Income before taxes 240 364 350 24 Income tax expense 71 109 104 25 Net income $ 169 $ 255 246 26 27 Dividends paid $ 125 $ 125 $ 100 28 The following schedule shows the sales revenue and components of costs of goods sold for 29 each of ABC's two products. 30 2016 34 38 40 28 The following schedule shows the sales revenue and components of costs of goods sold for each 29 of ABC's two products. 30 31 SCHEDULES OF GROSS PROFIT ($000's) 32 Years ended December 31 2017 2016 2015 33 Drones Sales $ 4,880 $ 4,932 $ 4,791 35 Cost of goods sold: 36 Materials 1,895 1,835 1,781 37 Labor 1,103 1,074 1,043 Overhead 689 664 662 39 Standard cost variances 3 5 (4) Depreciation 50 70 68 3,740 3,648 3,550 42 Gross Profit $ 1,140 $ 1,284 $ 1,241 43 44 Cattle Prods 45 Sales $ 2,870 $ 2,781 $ 2,702 46 Cost of goods sold: 47 Materials 888 868 840 Labor 537 532 505 49 Overhead 301 276 270 50 Standard cost variances (2) (3) 2 51 Depreciation 41 60 58 52 1,765 1,733 1,675 53 Gross Profit $ 1,105 $ 1,048 $ 1,027 54 55 41 48 2016 2015 $ 165 $ 2017 36 795 (70) 674 (60) 77 658 (60) 322 304 286 56 57 BALANCE SHEETS ($000's) 58 December 31 59 Cash $ 60 Accounts receivable 61 Allowance fo Bad debt allowance 62 Inventories: 63 Raw materials (at cost) 64 Finished goods: (at standard) 65 Drones 66 Cattle Prods 67 Prepaid expenses 68 Current assets 69 Land 70 Building and equipment 71 Accumulated depreciation 72 Total assets $ 738 913 405 710 374 390 8 2 4 2,409 450 1,865 (895) 3,829 2,213 450 1,858 (790) 3,731 2,049 450 1,831 (610) 3,720 $ $ 73 $ 837 $ 675 $ 694 16 14 13 74 75 76 77 10 11 40 40 40 78 100 100 858 79 80 Accounts payable Taxes payable Accrued interest Warranty liability Current portion of long-term debt Current liabilities Long-term debt Total liabilities Paid-in-capital Retained earnings Total stockholders'equity Total liabilities and equity 100 839 1,400 2,239 550 993 1,300 2,293 550 986 1,536 3,829 81 82 83 84 85 1,500 2,358 550 812 1,362 3,720 942 1,492 3,731 $ $ $ 86 87 Required: You are in the Planning phase of the audit. The engagement partner has asked you to perform analytical procedures to identify potential risks and areas of audit focus in ABC Inc's 2017 financial statements. Perform the following analytical procedurres on the financial statements and identify issues that you believe require 88 special attention in the 2017 audit. 89 90 1.) Prepare a Horizontal (Trend) Analysis of the Balance Sheet and Income Statement for 91 2017 compared to 2016. Show the change in dollars and the percentage change for each account. 92 Your audit planning materiality indicates that any variances greater than 10% year over 93 year should be further investigated. Identify the 94 potential audit implications for each balance to be investigated. 95 2.) Prepare Common Size Financial Statements (Vertical Analysis) for 2017, 2016 and 2015. 96 Identify fluctuations you believe should be investigated and 97 indicate the potential accounting and/or operating issues that 98 should be investigated. 99 3.) Compute the ratios included on the KPI Ratio Listing for 2017 and 2016. 100 Determine if there are ratios that you should investigate and indicate the potential 101 causes of these ratio changes. 102 4.) Using the information from Steps 1. 2. and 3. above, identify 4 findings and complete the Interim Audit Findings worksheet 103 and briefly state the primary audit procedure(s) you recommend. 104 105 Hand in Horizontal Analysis 106 Vertical Analysis 107 KPI Ratios 108 Interim Audit Findings 109 4 5 # 6 EXAMPLE 7 Unusual Account Fluctuation/Ratio Potential Business Issue Slowdown in A/R Collections Overstatement of A/R Valuation Audit Procedure(s) to be performed Inquire about collection issue, review calculation of AFDA 1 8 2 9 WN 3 10 4 11 12 13 14 15 16 17 18 19
