Stanton Enterprise Evidence Planning Worksheet to decide tests of details of balances for accounts receivable.

Case Stanton Enterprises Pamela Albright is the manager of the audit of Stanton Enterpises, a public company that manufactures formed steel subassemblies for other manufacturers. Albright is planning the 2005 audit and is considering an appropriate amount for planning materiality, what tolerable misstatement should be allocated to the financial statement accounts, and the appropriate inherent risks. Summary financial statement information is shown in Figure A-1. Additional relevant planning information is summarized below. 1. Stanton has been a client for 4 years, and Albright's firm has always had a good relationship with the company. Management and the accounting people have always been cooperative, honest, and positive about the audit and financial reporting. No material misstatements were found in the prior year's audit. Albright's firm has monitored the relationship carefully, because when the audit was obtained, Leonard Stanton, the CEO, had the reputation of being a \"high-flyer\" and had been through bankruptcy at an earlier time in his career. 2. Stanton runs the company in an autocratic way, primarily because of a somewhat controlling personality. He believes that it is his job to make all the tough decisions. He delegates responsibility to others but is not always willing to delegate a commensurate amount of authority. 3. The industry in which Stanton participates has been in a favorable cycle the past few years and that trend is continuing in the current year. Industry profits are reasonably favorable, and there are no competitive or other apparent threats on the horizon. 4. Internal controls for Stanton are evaluated as reasonably effective for all cycles but not unusually strong. Although Stanton supports the idea of control, Albright has been disappointed that management has continually rejected Albright's recommendation to establish an internal audit function. 5. Stanton has a contract with its employees that if earnings before taxes, interest expense, and pension cost exceed $7.8 million for the year, an additional contribution must be made to the pension fund equal to 5% of the excess. Required A. You are to play the role of Pamela Albright in the 12-31-05 audit of Stanton Enterprises. Make a preliminary judgment of materiality. Prepare an audit schedule showing your calculations. B. Make an acceptable audit risk decision for the current year as high, medium, or low, and support your answer (Explain) Document all conclusions. Consider financial and non-financial information. C. Perform analytical procedures (using ratio analysis, trend analysis, common-size financial statements, etc.) for Stanton Enterprises that will help you identify accounts that may require additional evidence in the current year's audit. Document the analytical procedures you perform and your conclusions. Include supporting details and document all work, explanations, and conclusions. D. The evidence planning worksheet to decide tests of details of balances for Stanton's accounts receivable is shown in Figure B-1. Use the information in the case and your conclusions in parts a-c to complete the following rows of the evidence planning worksheet: Acceptable audit risk, Inherent risk, and Analytical procedures. Make any assumptions you believe are reasonable and appropriate and document them. Figure A-1 Stanton Enterprises Summary Financial Statements Balance Sheet Cash Trade Accounts Receivable Allowance for uncollectible accounts Inventories Prepaid expenses Total Current Assets Property, plant, and equipment At cost Less accumulated depreciation Total P.P.&E. Goodwill Total Assets Accounts payable Bank loan payable Accrued liabilities Federal income taxes payable Current portion of long-term debt Total current liabilites Long-term debt Stockholders' equity: Common stock Additional paid-in capital Retained earnings Total Stockholder's equity Total liabilities and stockholders' equity Preliminary Audited 12-31-05 12-31-04 $ 243,689 3,544,009 (120,000) 4,520,902 29,500 8,218,100 $ 133,981 2,224,921 (215,000) 3,888,400 24,700 6,057,002 12,945,255 (4,382,990) 8,562,265 1,200,000 $ 17,980,365 $ 2,141,552 150,000 723,600 1,200,000 240,000 4,455,152 960,000 9,922,534 (3,775,911) 6,146,623 345,000 $ 12,548,625 $ 2,526,789 --------------598,020 1,759,000 240,000 5,123,809 1,200,000 1,250,000 2,469,921 8,845,292 12,565,213 $ 17,980,365 1,000,000 1,333,801 3,891,015 6,224,816 $ 12,548,625 Combined Statement of Income and Retained Earnings Sales COGS Gross Profit Selling, general, and administrative expenses Pension cost Interest Expense Total operating expenses Income Before Taxes Income tax expense Net income Beginning retained earnings Dividends declared Ending retained earnings $ 43,994,931 24,197,212 19,797,719 10,592,221 1,117,845 83,376 11,793,442 8,004,277 1,800,000 6,204,277 3,891,015 10,095,292 (1,250,000) $ 8,845,292 $ 32,258,015 19,032,229 13,225,786 8,900,432 865,030 104,220 9,869,682 3,356,104 1,141,000 2,215,104 2,675,911 4,891,015 1,000,000 $ 3,891,015 Acceptable audit risk Inherent risk Contol risk-Sales Contol risk- Cash receipts ControlriskAdditional controls Substantive tests of transactions- Sales Substantive tests of transactions- Cash receipts Analytical Procedures Planned detection risk for tests of details of balances Planned audit evidence for tests of details of balances Presentation and disclosure Rights Realizable Value Cutoff Accuracy Completeness Existence Detail tie-in Figure B-1: Stanton Enterprises Evidence Planning Worksheet