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 teams 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:

Write an engagement letter, dated 11/6/2016, by completing WP 2-1.

Perform the preliminary analytical procedure WP 3-1 and 3-2 and comment on:

The client liquidity, profitability and solvency.

The client ability to continue as a going concern.

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.

Complete the audit of the accounts receivables:

Calculate the sample size for A/R confirmation by following steps in WP 25-2.

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.

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).

Assuming that all other tests came to be satisfactory, prepare an audit report (dated 2/21/2017) assuming that:

The client made the suggest adjusting entry.

The client did not do the adjusting entry (only if different from the above one).

Complete the project by having all of the required workpapers with a cover page that has your group number and names of the group members, in one word document, and drop it in the drop box on D2L by the midnight of Sunday 4/22/2018. No late assignment will be accepted.

Notes:

Comparative income statements and balance sheets are provided.

Make sure to initial every document. [If you are from the morning (evening) class group # 1, your initial will be MG1 (EG1)].

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:

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:

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.

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.