Question
Smackey Dog Foods Inc. started in the kitchen of Sarah, Kim, and Jillian?s family home in the suburbs of Chicago. The three sisters initially bought
Smackey Dog Foods Inc. started in the kitchen of Sarah, Kim, and Jillian?s family home in the suburbs of Chicago. The three sisters initially bought the ingredients for their natural dog food recipes from the local grocery store. They used their dogs and the neighborhood dogs as their taste testers. Their dog food products were so good, the local kennels and veterinary offices were glad to distribute the sisters' products to their customers.
Local demand increased significantly. Local pet stores and small grocery stores discovered the products and became distributors. The sisters moved the expanding business into a larger facility and hired a few more workers. Although their competitors? sales were flat or declining, Smackey Dog Food Inc.?s sales were on a vertical climb!
Sales were so good last year that the sisters opened a boutique division named Best Boy Gourmet, specializing in freshly manufactured, one-serving packages meant for consumption no later than 3 days after production. They sell this product at three times the cost of their other products and by special order only through their new website. Demand is high, but waste has been an issue.
Sarah is the president and general manager of the operation. Sarah has been very proactive in growing the business. She has met with her banker to discuss expanding the facilities and equipment with another $150,000 loan. Their first loan for $150,000 was secured by the industrial-size food production equipment purchased with the loan. The banker now demands an audit of the corporate financial statements before releasing another loan to the company. Sarah has offered to place the corporate account receivables up as collateral to secure the second loan. Based on revenue projections by her sister Jillian?s sales team, Sarah believes that the company will not have trouble paying down the loan in a short period of time.
Kim manages the production operations. She oversees the inventory, production, and shipment of dog food products. The Best Boy Gourmet line has taken almost all of her attention lately. The winter holidays are approaching, and sales demand based on forecasts from the sales force are higher than ever. Attaining fresh, raw ingredients is more difficult in the winter months. If any of the fresh ingredients are delayed, production comes to a standstill. There has been significant inventory waste as a result.
Kim?s assistant, Henry, monitors the production and shipment of Smackey Dog Food?s regular line of product. Henry takes pride in his work and is involved in every facet of the operation. With only one other warehouse employee to help, Henry personally is involved in preparing and approving all inventory records. Henry ensures that very little finished inventory sits in the warehouse. However, the shipping dock always seems to be full of returned dog food that should be restocked. When Kim asks him about it, Henry laughs and tells her that "first in, first out" applies to dog food returns as well. Kim smiles and just accepts that answer.
Jillian is not very good at understanding accounting. The sisters placed Jillian in charge of sales. She manages a sales team of 12 salesmen in Illinois, Indiana, and Wisconsin. Her fear of flying and poor driving skills limit her ability to get around to the areas outside of Chicago. As a result, she has placed a lot of faith in her sales team. The sales team complained last year that they did not like waiting for their commissions until after bookkeeping calculated the actual revenues. In order to keep their spirits fired up, Jillian has her sales people project what their sales will be in the upcoming quarter, and she pays commissions in advance on those projections. The sales team loves her, and Jillian loves their approval. Jillian has noticed that the projections typically are off by 11% on average.
The employees of Smackey Dog Food Inc. all own dogs. It was a hiring requirement on the job application. One employee was fired when it was discovered she never owned a dog when she was hired. A lawsuit is pending by the fired employee.
At this time, the receivables represent 29% of the corporate assets. The Chicago retail chain Pup Stores Co. is Smackey Dog Food?s largest buyer. It alone represents 31% of overall sales and usually pays within 30 days. However, Pup Stores is facing a major lawsuit from an animal rights group. The legal fees are eating into the company's cash reserves, and it is facing some store closures.
The accounts receivable aging indicates that 38% of the receivables are 30 days or less. Twenty-two percent are 31?60 days. Twenty-one percent of the receivables are 61?90 days old. Ten percent are 90?120 days. The remaining receivables are older than 120 days. Sarah has not written off any of the receivables, nor will she.
Sales are projected to steadily grow at 16% next year if the company does not expand its facilities. With the expansion, sales are projected to rise 26%, with the most significant jump in the last quarter after expansion is completed and holiday sales pick up.
Your Role
You and your firm, Keller CPAs, have never audited a dog food manufacturer. Although it is late in the year to be accepting a new calendar-year-end audit, you need the work and have the time to devote to the audit before your 2-week ski vacation in February.
You begin the audit process just prior to year-end by sending your audit manager, Pete, and two audit staffers, Ben and Maureen, out to the client. They spend time assessing the client and planning the audit.
During the first month of field work after year-end, Ben and Maureen note that the dog food bags piled high on the docks are marked ?Returned.? One employee is seen throwing bags of the premium Best Boy Gourmet dog food into the dumpster in the morning and pulling it out and throwing it into Henry?s car during the employee lunch hour.
Pete?s new best friend, Alan, was married to Smackey Dog Food Inc.?s owner, Kim, 4 years ago. Alan is also good friends with the banker from whom Sarah is seeking the loan. Pete is unaware of the relationship. Pete has talked about some of the details of the audit to Alan over a few beers.
Required : prepare one short (five to seven pages, double-spaced) paper based on the Smackey Dog Food Inc. case facts above. The purpose of the project is to move beyond the black letter into the actual practical application of legal principles in real-life situations.
in addition, please answer the questions in theattachment, use the YTD financial activity. (see link below) This a privately held company.
Worksheet for You Decide Name ____________ Course Code _________ Grade ___/ Date__/__/__ Questions: Q1: Discuss how the SEC has influence (if any) over the audit of Smackey Dog Foods, Inc. Solution: Type your answer here Q2: Discuss the essential activities involved in the initial planning of an audit. How do these all specifically to the Smackey Dog Food client? Solution: Type your answer here Q3: Discuss the 4 stages of the audit and the major activities performed by the auditor in each phase. Give an example of how each of these specifically applies to the Smackey Dog Food, Inc audit. For instance, examine the apparent internal control weaknesses and possible negative outcome of each. Solution: Type your answer here Q4: Describe Keller CPAs' responsibilities related to communications regarding internal control matters. What internal controls issues do you identify? Solution: Type your answer here Q5: You decide that you will address Smackey Dog Food, Inc.'s accounts receivables through confirmations. Discuss the various types of confirmations and what forms you will implement and why. Solution: Type your answer here Q6: What are the major factors affecting sample size for confirming accounts receivable? Solution: Type your answer here Q7: A major issue in verifying the ending balance in property, plant and equipment is the possibility of legal encumbrances. Discuss what specific concern do you have. Describe the procedures your firm will perform to obtain evidence about existing legal encumbrances. Solution: Type your answer here Q8: The client wants to know if you will be present at the year-end inventory. What is your decision and why? What role or actions will you take at the inventory if you decide to attend the inventory. Why? Solution: Type your answer here Q9: Considering the general six functions that make up the inventory and warehousing cycle for Smackey Dog Foods, Inc., identify the related documents and/or records that would be used. From your analysis of the internal controls related to the inventory and warehousing cycle of Smackey Dog Foods, Inc., what internal control weaknesses exist? Solution: Type your answer here Q10: Discuss if Keller CPAs or its auditors are breaching any Professional Rules of Conduct and why or why not? Solution: Type your answer here Q11: Discuss the CPA firm's legal liability concerns for this audit if they make a material unintentional or intentional mistake. Include any other legal liability concerns regarding possible Professional Rule violations. Solution: Type your answer here Katyana Terrell Accounting 555 Week 7 - Course Project Questions: Q1: Discuss how the SEC has influence (if any) over the audit of Smackey Dog Foods, Inc. Solution: The Securities and Exchange Commission has a significant influence on the audit of Smackey Dog Foods, Inc. by Keller CPAs. The audit standards that have to be followed in establishing the independence of auditors involved in the audit of Smackey depict the influence on the audit. Auditors need to observe principles in the audit of publicly listed companies. Independence responsibilities, the public interest, integrity; objectivity and independence, due care, and scope and nature of services are some of the ethical principles of the American Institute of Certified Public Accountants (AICPA) Code of Professional Conduct. Audit team members are required to ensure the principles of objectivity and independence in discharging professional responsibilities in here the influence of the SEC is very obvious. Under the SOX, objectivity and independence are some principles to be followed otherwise legal actions can be taken Thus above standards can also be applied to the audit of non public companies like Smackey Dog Foods, Inc. (http://www.aicpa.org/Research/Standards/CodeofConduct/DownloadableDocuments/201 4December15ContentAsof2014May15CodeofConduct.pdf- page 7-11} Q2: Discuss the essential activities involved in the initial planning of an audit. How do these all specifically to the Smackey Dog Food client? Solution: Some of the activities involved in initial planning as related to audit of Smackey are as follows:- 1. Obtain knowledge of business and industry. Members of the Audit team, the audit manager Pete and two audit staffers Ben and Maureen must understand the client's business and industry. 2. Assess client business risk. The audit team should assess the risk of material misstatements arising from Smackey's business risk which have impact on audit. 3. Perform preliminary analytical procedures. Auditor is required to compare the performance of Smackey's with the industry to assess the business risk and therefore analytical procedures are required to be performed. 4. Acceptable level of materiality and inherent risk should be set up Acceptable level of materiality is to be set and therefore it must be assessed according to the experience of auditor 5. Develop overall audit plan and audit program. The overall plan should be framed to provide reasonable basis of the opinion of auditor's report. (http://www.prenhall.com/behindthebook/0136128270/pdf/Arens_CH08%20FINAL.pdf page 208-2010) Q3: Discuss the 4 stages of the audit and the major activities performed by the auditor in each phase. Give an example of how each of these specifically applies to the Smackey Dog Food, Inc audit. For instance, examine the apparent internal control weaknesses and possible negative outcome of each. Solution: The four stages of audit and how each of the major activities specifically applies to the audit of Smackey Dog Food, Inc. are described as follows: 1. Planning and risk assessment. Auditor is required to assess the business risk involved in clients business which helps to determine the scope of audit related audit objective - occurrence, completeness, accuracy, classification, timing and posting and summarization. 2. Test of internal controls. Test of internal control will help to identify the material weakness in the business firm and this may include making inquiries of appropriate client personnel, examining documents, records, and reports maintained by Smackey 3. Substantive tests. Audit team can perform substantive tests on the balances of the accounts receivables and inventory accounts. However this test may include substantive tests of transactions, analytical procedures and test of details of balances. 4. Finalization At this stage auditor is required to evaluate and review the audit evidence obtained in the audit, and then form an audit opinion based on the evidence obtained. (http://www.accountingweb.com/community-voice/blogs/admin/gao-4-phases-to-the-auditnot-3) Q4: Describe Keller CPAs' responsibilities related to communications regarding internal control matters. What internal controls issues do you identify? Solution: Generally accepted accounting and auditing standards require that auditor should perform his duties and communicate the same to the board of directors, shareholders as well as those charged with governance The following internal control issues were identified as regards the audit for Smackey Dog Food, Inc. and thus have to be communicated to interested groups of Smackey: 1. Granting of commissions to sales people based on estimated sales. Risk with regard to sales made to persons who are making sales on estimated basis. . 2. Segregation of authorities and responsibilities with regard to inventory. As all the work from handling of inventory to maintenance of records is done by single person therefore chances are there that material misstatement may take place 3. Lack of internal control procedures with respect to management of inventory. 4. Lack of internal control procedures with respect to accounts receivables Q5: You decide that you will address Smackey Dog Food, Inc.'s accounts receivables through confirmations. Discuss the various types of confirmations and what forms you will implement and why. Solution: Accounts receivable confirmation is generally classified into two parts namely: 1) positive and 2) negative confirmations. Positive confirmations are confirmations which show a positive response with regard to the balance owned by them to the company. Blank and invoice confirmation forms are examples of positive confirmations A negative confirmation is required by the debtors only when are not satisfied or disagree with the balance as per client's record. (http://www.accountingtools.com/questions-and-answers/what-is-an-accounts-receivableconfirmation.html) In the case Smackey Dog Food, Inc.'s accounts receivables, invoice confirmation form under the positive confirmation approach is recommended. Q6: What are the major factors affecting sample size for confirming accounts receivable? Solution: The following are factors affect the sample size for confirming accounts receivable: 1. Level of accounts receivable and financial statement misstatement. 2. Inherent risk 3. Control risk. 4. Detection risk 5. Type of confirmation obtained either internally or from outside sources. https://books.google.co.in/books? id=G1ruVmsiJ6oC&pg=PA65&lpg=PA65&dq=major+factors+affecting+sample+size+for+c onfirming+accounts+receivable&source=bl&ots=BH_7vk0rqn&sig=pm8cxkU5RfX71hLcila Mx0OlcCw&hl=en&sa=X&ved=0ahUKEwjVlGQ5IDLAhURjo4KHRg4BBYQ6AEIPjAG#v=onepage&q=major%20factors%20affecting %20sample%20size%20for%20confirming%20accounts%20receivable&f=false -page 65) Q7: A major issue in verifying the ending balance in property, plant and equipment is the possibility of legal encumbrances. Discuss what specific concerns you have. Describe the procedures your firm will perform to obtain evidence about existing legal encumbrances. Solution: Keller CPAs will need to perform the following to obtain evidence about existing legal encumbrances include: 1. Inquiry with property, plant and equipment custodians 2. Review of minutes of meetings 3. Review of notes during inspection of property, plant and equipment inventory observations and carefully examine its purchase contracts and agreements 4. Obtain Confirmation of the liabilities of client's business 5. Examine lease agreements The major objective is to ensure that property plant or equipment pledged as collateral should not be sold or damaged. Q8: The client wants to know if you will be present at the year-end inventory. What is your decision and why? What role or actions will you take at the inventory if you decide to attend the inventory? Why? Solution: Presence of audit team at the time of physical inventory count will provide that work is carried out carefully and systematically Thus, the auditor's responsibility is required to ensure that employees of client are following the instructions properly during the count. The auditor must test the efficiency by arranging for a count or a recount of selected items in the audit team's presence. Moreover, the auditor must take notes during physical count which are considered necessary for follow up. These can include details of items of inventory selected so that the particulars may be checked to the final count sheets; lists of items actually counted in the auditor's presence; details of any inventory noted by the auditor as being obviously defective, damaged or slow-moving; etc. Q9: Considering the general six functions that make up the inventory and warehousing cycle for Smackey Dog Foods, Inc., identify the related documents and/or records that would be used. From your analysis of the internal controls related to the inventory and warehousing cycle of Smackey Dog Foods, Inc., what internal control weaknesses exist? Solution: The six general functions that make up the client's inventory and warehousing cycle are: 1. Processing of purchase orders - purchase requisitions, quotations from suppliers, and purchase orders 2. Receipt of purchased materials in the premises - receiving report 3. Storage of materials or inventory so received in the warehouse - materials requisition form 4. Processing raw materials - job cost sheet, process cost sheets 5. Storage of finished goods - sales invoice, sales order form. 6. Shipping finished goods - shipping form and invoices. Internal control weaknesses observed as regards Smackey's inventory and warehousing cycles are: 1. Receipt, storage and disposal of returned dog foods are not according to the set procedures. 2. Receipt, storage processing is done by single person. Thus, breach of internal control is possible. Q10: Discuss if Keller CPAs or its auditors are breaching any Professional Rules of Conduct and why or why not? Solution: Yes, the members of the audit team assigned to Smackey's are breaching confidentiality as one of the Professional Rules of Conduct. In the case, Pete, a member of the audit team, has been discussing details of the audit to Alan over few beers and thus he has violated the confidentiality as one of the principles of professional code of conduct. Code of professional ethics requires that auditors perform the audit with the highest sense of integrity. Q11: Discuss the CPA firm's legal liability concerns for this audit if they make a material unintentional or intentional mistake. Include any other legal liability concerns regarding possible Professional Rule violations. Solution: The audit profession agrees that audit is sole opinion based activity of an auditor. Such opinion is to be based on the financial statements provided by the management and management is responsible to ensure that financial statements are free from material misstatements. IF auditor performs his duties with due care he is absolved from legal liability otherwise he will be guilty of such legal liability. Questions: Q1: Discuss how the SEC has influence (if any) over the audit of Smackey Dog Foods, Inc. Solution: The Securities and Exchange Commission has a significant influence on the audit of Smackey Dog Foods, Inc. by Keller CPAs. The audit standards that have to be followed in establishing the independence of auditors involved in the audit of Smackey depict the influence on the audit. Auditors need to observe principles in the audit of publicly listed companies. Independence responsibilities, the public interest, integrity; objectivity and independence, due care, and scope and nature of services are some of the ethical principles of the American Institute of Certified Public Accountants (AICPA) Code of Professional Conduct. Audit team members are required to ensure the principles of objectivity and independence in discharging professional responsibilities in here the influence of the SEC is very obvious. Under the SOX, objectivity and independence are some principles to be followed otherwise legal actions can be taken Thus above standards can also be applied to the audit of non public companies like Smackey Dog Foods, Inc. (http://www.aicpa.org/Research/Standards/CodeofConduct/DownloadableDocuments/201 4December15ContentAsof2014May15CodeofConduct.pdf- page 7-11} Q2: Discuss the essential activities involved in the initial planning of an audit. How do these all specifically to the Smackey Dog Food client? Solution: Some of the activities involved in initial planning as related to audit of Smackey are as follows:- 1. Obtain knowledge of business and industry. Members of the Audit team, the audit manager Pete and two audit staffers Ben and Maureen must understand the client's business and industry. 2. Assess client business risk. The audit team should assess the risk of material misstatements arising from Smackey's business risk which have impact on audit. 3. Perform preliminary analytical procedures. Auditor is required to compare the performance of Smackey's with the industry to assess the business risk and therefore analytical procedures are required to be performed. 4. Acceptable level of materiality and inherent risk should be set up Acceptable level of materiality is to be set and therefore it must be assessed according to the experience of auditor 5. Develop overall audit plan and audit program. The overall plan should be framed to provide reasonable basis of the opinion of auditor's report. (http://www.prenhall.com/behindthebook/0136128270/pdf/Arens_CH08%20FINAL.pdf page 208-2010) Q3: Discuss the 4 stages of the audit and the major activities performed by the auditor in each phase. Give an example of how each of these specifically applies to the Smackey Dog Food, Inc audit. For instance, examine the apparent internal control weaknesses and possible negative outcome of each. Solution: The four stages of audit and how each of the major activities specifically applies to the audit of Smackey Dog Food, Inc. are described as follows: 1. Planning and risk assessment. Auditor is required to assess the business risk involved in clients business which helps to determine the scope of audit related audit objective - occurrence, completeness, accuracy, classification, timing and posting and summarization. 2. Test of internal controls. Test of internal control will help to identify the material weakness in the business firm and this may include making inquiries of appropriate client personnel, examining documents, records, and reports maintained by Smackey 3. Substantive tests. Audit team can perform substantive tests on the balances of the accounts receivables and inventory accounts. However this test may include substantive tests of transactions, analytical procedures and test of details of balances. 4. Finalization At this stage auditor is required to evaluate and review the audit evidence obtained in the audit, and then form an audit opinion based on the evidence obtained. (http://www.accountingweb.com/community-voice/blogs/admin/gao-4-phases-to-the-auditnot-3) Q4: Describe Keller CPAs' responsibilities related to communications regarding internal control matters. What internal controls issues do you identify? Solution: Generally accepted accounting and auditing standards require that auditor should perform his duties and communicate the same to the board of directors, shareholders as well as those charged with governance The following internal control issues were identified as regards the audit for Smackey Dog Food, Inc. and thus have to be communicated to interested groups of Smackey: 1. Granting of commissions to sales people based on estimated sales. Risk with regard to sales made to persons who are making sales on estimated basis. . 2. Segregation of authorities and responsibilities with regard to inventory. As all the work from handling of inventory to maintenance of records is done by single person therefore chances are there that material misstatement may take place 3. Lack of internal control procedures with respect to management of inventory. 4. Lack of internal control procedures with respect to accounts receivables Q5: You decide that you will address Smackey Dog Food, Inc.'s accounts receivables through confirmations. Discuss the various types of confirmations and what forms you will implement and why. Solution: Accounts receivable confirmation is generally classified into two parts namely: 1) positive and 2) negative confirmations. Positive confirmations are confirmations which show a positive response with regard to the balance owned by them to the company. Blank and invoice confirmation forms are examples of positive confirmations A negative confirmation is required by the debtors only when are not satisfied or disagree with the balance as per client's record. (http://www.accountingtools.com/questions-and-answers/what-is-an-accounts-receivableconfirmation.html) In the case Smackey Dog Food, Inc.'s accounts receivables, invoice confirmation form under the positive confirmation approach is recommended. Q6: What are the major factors affecting sample size for confirming accounts receivable? Solution: The following are factors affect the sample size for confirming accounts receivable: 1. Level of accounts receivable and financial statement misstatement. 2. Inherent risk 3. Control risk. 4. Detection risk 5. Type of confirmation obtained either internally or from outside sources. https://books.google.co.in/books? id=G1ruVmsiJ6oC&pg=PA65&lpg=PA65&dq=major+factors+affecting+sample+size+for+c onfirming+accounts+receivable&source=bl&ots=BH_7vk0rqn&sig=pm8cxkU5RfX71hLcila Mx0OlcCw&hl=en&sa=X&ved=0ahUKEwjVlGQ5IDLAhURjo4KHRg4BBYQ6AEIPjAG#v=onepage&q=major%20factors%20affecting %20sample%20size%20for%20confirming%20accounts%20receivable&f=false -page 65) Q7: A major issue in verifying the ending balance in property, plant and equipment is the possibility of legal encumbrances. Discuss what specific concerns you have. Describe the procedures your firm will perform to obtain evidence about existing legal encumbrances. Solution: Keller CPAs will need to perform the following to obtain evidence about existing legal encumbrances include: 1. Inquiry with property, plant and equipment custodians 2. Review of minutes of meetings 3. Review of notes during inspection of property, plant and equipment inventory observations and carefully examine its purchase contracts and agreements 4. Obtain Confirmation of the liabilities of client's business 5. Examine lease agreements The major objective is to ensure that property plant or equipment pledged as collateral should not be sold or damaged. Q8: The client wants to know if you will be present at the year-end inventory. What is your decision and why? What role or actions will you take at the inventory if you decide to attend the inventory? Why? Solution: Presence of audit team at the time of physical inventory count will provide that work is carried out carefully and systematically Thus, the auditor's responsibility is required to ensure that employees of client are following the instructions properly during the count. The auditor must test the efficiency by arranging for a count or a recount of selected items in the audit team's presence. Moreover, the auditor must take notes during physical count which are considered necessary for follow up. These can include details of items of inventory selected so that the particulars may be checked to the final count sheets; lists of items actually counted in the auditor's presence; details of any inventory noted by the auditor as being obviously defective, damaged or slow-moving; etc. Q9: Considering the general six functions that make up the inventory and warehousing cycle for Smackey Dog Foods, Inc., identify the related documents and/or records that would be used. From your analysis of the internal controls related to the inventory and warehousing cycle of Smackey Dog Foods, Inc., what internal control weaknesses exist? Solution: The six general functions that make up the client's inventory and warehousing cycle are: 1. Processing of purchase orders - purchase requisitions, quotations from suppliers, and purchase orders 2. Receipt of purchased materials in the premises - receiving report 3. Storage of materials or inventory so received in the warehouse - materials requisition form 4. Processing raw materials - job cost sheet, process cost sheets 5. Storage of finished goods - sales invoice, sales order form. 6. Shipping finished goods - shipping form and invoices. Internal control weaknesses observed as regards Smackey's inventory and warehousing cycles are: 1. Receipt, storage and disposal of returned dog foods are not according to the set procedures. 2. Receipt, storage processing is done by single person. Thus, breach of internal control is possible. Q10: Discuss if Keller CPAs or its auditors are breaching any Professional Rules of Conduct and why or why not? Solution: Yes, the members of the audit team assigned to Smackey's are breaching confidentiality as one of the Professional Rules of Conduct. In the case, Pete, a member of the audit team, has been discussing details of the audit to Alan over few beers and thus he has violated the confidentiality as one of the principles of professional code of conduct. Code of professional ethics requires that auditors perform the audit with the highest sense of integrity. Q11: Discuss the CPA firm's legal liability concerns for this audit if they make a material unintentional or intentional mistake. Include any other legal liability concerns regarding possible Professional Rule violations. Solution: The audit profession agrees that audit is sole opinion based activity of an auditor. Such opinion is to be based on the financial statements provided by the management and management is responsible to ensure that financial statements are free from material misstatements. IF auditor performs his duties with due care he is absolved from legal liability otherwise he will be guilty of such legal liabilityStep by Step Solution
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