NOTE : I have questions and also provided answers but it is too complicated to understand the answers, can someone please summery each answers for me to better understanding. (Auditing)

King Companies, Inc. King Companies, Inc (KCI) is a private company that owns five auto parts stores in urban Los Angeles, California. KCI has gone from two auto parts stores to five stores in the last three years, and it plans continued growth. Eric and Patricia King own the majority of the shares in KCI. Eric is the chairman of the board of directors of KCI and CEO, and Patricia is a director as well as the CFO. Shares not owned by Eric and Patricia are owned by friends and family who helped the Kings get started. Eric started the company with one store after working in an auto parts store. To date, he has funded growth from an inheritance and investments from a few friends. Eric and Patricia are thinking about expanding by opening three to five additional stores in the next few years. In October 2021, Eric approached your accounting firm, Thornson & Danforth, LLP, to conduct an annual audit of KCI for the year ended December 31, 2022. KCI has not been audited before, but this year the audit has been requested by the companys bank because of anticipated bank loans and by a new private equity investor that has just acquired a 20% share of KCI. KCI employs 20 full-time staff. These workers are employed in store management, sales, parts delivery, and accounting. About 40% of KCIs business is retail walk-in business, and the other 60% is regular customers where KCI delivers parts to their locations and bills these customers on account. During peak periods, KCI also uses part-time workers. Eric is focused on growing revenues. In his opinion, revenue growth is particularly important to obtaining bank financing. Patricia trusts the companys workers to work hard for the company, and she feels they should be rewarded well. The accounting staff, in particular, is very loyal to the company. Eric tells you that accounting staff enjoy their jobs so much they have never taken any annual vacations, and hardly any workers ever take sick leave. There are two people currently employed as accounting staff, the most senior of whom is Jonathan Jung. Jonathan heads the accounting department and reports directly to Patricia. He is in his late fifties and hopes to retire in two or three years and move away from Los Angeles. Jonathan keeps a close watch on accounting and does many activities himself; including opening mail, cash receipts and vendor payments, depositing funds received, performing reconciliations, posting journals, and performing the payroll function. His second employee, Abby Owens, is a recent college graduate who just passed the CPA exam. Abby is responsible for the payroll functions and posting all journal entries into the accounting system. Jonathan and Abby often help each other out in busy periods.

Questions:

1. Analysis: Consider the risk of fraud regarding the diversion of cash receipts from customers. How does this impact your decisions regarding which audit procedures to perform, the timing of audit procedures, or the extent of procedures associated with auditing revenue assertions? If cash were diverted from customers, how might Eric or Patricia identify the problem?

2. Analysis: Explain your assessment of the risk associated with fraudulent financial reporting. How does this impact your decisions regarding which audit procedures to perform, the timing of audit procedures, or the extent of procedures associated with auditing revenue assertions?

3. Analysis: You have been asked by your audit manager to consider how the audit firm might audit revenues by using audit data analytics to evaluate 100% of the revenue transactions. Where do you feel that it would be most effective to audit 100% of the transactions using ADA? In addition to the sales information, what other information should you consider in your analysis? Develop a specific audit strategy for how you would screen 100% of the revenues, how you would identify exceptions, and how you might consider what would be acceptable variations from your expectation norm versus unacceptable variations.

Answers:

1. Jonathan does many activities himself; including opening mail, cash receipts and vendor payments, depositing funds received, performing reconciliations, posting journals, and performing the payroll function. As a result, he has the ability to potentially divert cash receipts from customers. However, these would likely be payment on receivables, so Jonathan would have to reduce the customers receivable. This would need to involve some type of lapping scheme, or writing a journal entry to write down the amount owed by a customer. Eric or Patricia might identify the problem if they note a receivable being posted to the wrong customers account, or a write-off of an accounts receivable that should not have been written off.

2. The risk of fraudulent financial reporting is primarily related to Erics desire to show an increase in revenues to support a bank loan. Given that internal controls are weak at King Companies, Inc., the auditor is already following a primarily substantive approach, auditing revenues and receivables at year-end, and using larger sample sizes. The auditor might pay particular attention to any journal entries increasing revenues at year end. The auditor should also pay particular attention to year-end cutoff procedures to ensure a proper cutoff on revenue transactions.

3. First, an auditor would normally use audit data analytics (ADA) when internal controls are strong, which is not the case for King Companies, Inc. due to segregation of duties issues. Hence, the auditor would potentially use ADA as a risk assessment procedure to identify transactions that are out of the ordinary. The auditor might also treat revenues from store sales supported by daily cash or credit card receipts separate from sales to customers made on account. With respect to daily cash sales, it would be easy to use ADA to match cash sales to bank deposits. There would be no acceptable variation from cash sales not matching cash deposits. Further, the auditor might consider whether it is feasible to match sales to subsequent cash receipts from customers. With respect to acceptable variations it might be that a customer does not make a payment in full, but just payment on account. Failure to make a full payment would cause the auditor to investigate the customers account in more detail.

NOTE : I have questions and also provided answers but it is too complicated to understand the answers, can someone please summery each answers for me to better understanding.