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). 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)]. 3. In the analytical procedure section, do not explain the ratios, rather provide the conclusions that you arrived to based on the results of the ratio analysis. 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 3-5 XYZ Corp. Measurement base Preliminary materiality Judgment Percentage Applied Preliminary materiality (e.g., income, revenue, assets) $ (put the name of the base here) % $ (rounded) 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. Account Solvency: AccountS NUUCivuit Luau ShtUT name and Please write your conclusions and comments on the client Solvency ratios here. receivable Going concern: ?? ts ?? ?? Please write your conclusions and comments on the client's ability to continue as a going concern based on the above ratio analysis here. Conclusions: The accounts receivable account is ????? (fairly on NOT fairly stated) XYZ Balance Sheet XYZ Income Statement XYZ Corporation ANNUAL BALANCE SHEET ($ thousands) 12/31/16 12/31/15 ASSETS Cash & Equivalents 24991 29514 Net Receivables 26388 25606 Inventories 13764 13642 Prepaid Expenses 0 12864 0 14908 12/31/14 Other Current Assets Total Current Assets 78007 83670 Gross Plant Property & Equipment 63750 44078 Accumulated Depreciation 12349 9275 Net Plant Property & Equipment 51401 34803 Investments at Equity 9201 Other Investments 18500 Intangibles 5947 8350 16006 6410 Deferred Charges 0 0 Other Assets 31464 28438 TOTAL ASSETS 194520 177677 LIABILITIES Long Term Debt Due In One Year 0 0 Notes Payable 19562 14988 Accounts Payable 24062 22529 Taxes Payable 0 0 Accrued Expenses 5865 Other Current Liabilities 21977 5726 22458 Total Current Liabilities 71466 65701 Long Term Debt 43549 31853 Deferred Taxes 0 0 Investment Tax Credit 0 0 39182 44099 I, Other Liabilities TOTAL LIABILITES 154197 141653 Redeemable Noncontrolling Int. 0 0 EQUITY Preferred Stock - Redeemable Preferred Stock - Nonredeemable 0 0 0 0 Total Preferred Stock Common Stock Capital Surplus Retained Earnings 0 0 15 16 27607 28937 28780 12249 6504 10703 0 0 0 Less: Treasury Stock Common Equity 39871 35457 39498 Stockholder's Equity - Parent 39871 35457 42607 Nonredeemable Noncontrolling Int. 452 567 567 Stockholder's Equity - Total 40323 36024 43174 37000 TOTAL LIABILITIES & EQUITY 194520 177677 166344 149422 COMMON SHARES OUTSTANDING 1500 1600 1500 1366.374