Securities and Exchange Commission Audit

Securities and Exchange Commission (SEC) bears a responsibitity for the uditing standards provisin that are required to audit Smackey Dog Food Inc. So, they should influence this company’s audit (Arens et al., 2007). Additionally, the independent audition process has to be determined before being submitted as a task of auditing a company like Smackey Dog Food Inc. The main ethical principles like iintegrity, objectivity, public interest, and ndependence, are known to be the crucial elements of auditing process. The same as American Institute of Certified Public Accountants, Securities and Exchange Commission aims to make ssure that the auditing team members operate based on their expertise, professionalism and don’t provoke any conflicts of interest while conducting the audit (Arens et al., 2007). In addition, they will have to be stick to the objective of the audit. Since these standards are applied to both public and private companies, they will influence the conduct of the audit team and the outcome of the audit report.

Question Two

Generally, initial planning of an audit involves understanding of the industry and specific case brought by clients. Preliminary analysis has to be conducted to gain more insights on the case. In relation to Smackey Dog Food Inc., the following activities have to be carried out during the initial plan.

Business and Industry Understanding- One of the initial steps in auditing is understanding the client’s needs in terms of business operations in relation to the industry or sector of operation. Although Ben, Maureen, and Pete have interacted with some members of Smackey Dog Food Inc. at some point, they will still need to gain an understanding of the company related to the industry it operates in.

Preliminary Business Analysis- Before assessment of the underlying business risks, the CPAs team critically analyzes Smackey Dog Food Company’s performance and compares with similar firms in the industry (Grenier, Pomeroy & Stern, 2015). This step helps in identifying the potential areas where there may be problems. In addition, it will help the team to assess and come up with acceptable audit and inherent risks for the company.

Develop audit plan- Based on the preliminary assessments, the audit team can now develop audit plan for Smackey Dog Food Inc. The plan will help overcoming the audit risks and achieving the auditing objectives.

Question Three

Risk Assessment and Planning- Risk assessment of Smackey Dog Food can be achieved in the preliminary understanding of the business and industry operations. For instance, by examining how Sarah, Kim, and Jilian discharges their duties in management, sales, and production operations will help in audit team to assess the risks for the activities and transactions related to their departments (Ecker, Francis, Olsson & Schipper, 2013). Therefore, accuracy, completeness, and occurrence will be established.

Control and Transaction Tests- Based on the understanding of the company’s internal control, the audit team can obtain additional information by contacting the company clients and verifying the transactions and records. Furthermore, performing client procedures on its affiliates like Best Boy Gourmet and Pup Stores will help in carrying out test of controls.

Analytical Procedures- Any addition evidence can be obtained by performing tests on balances details. This step critically analyses the possible misstatements of balances in Smackey’s financial statements and the overall reasonableness of the recorded transactions. For instance, testing inventory and account receivable balances will help to achieve these objectives.

Issuance of Audit Report- The audit report will be submitted to the company’s management summarizing the test results after completion of the first three stages.

Question Four

Keller CPAs’ is required to communicate to the management in writing concerning the identified risks and weaknesses in Smackey’s internal control and financial reporting. The following internal control cases are identified from Smackey’s operations:

There were no standard procedures and guidelines of handling and reporting returned foods. Due to this, employees took advantage and carried the foods home.

Cases of material misstatements were attributed to the fact that only an individual was given the responsibility of preparation and approval of inventories. Inventory handling is a major problem in the company.

There were no procedures to help in control the risks in account receivables. The fact that a customer with 31% of company sales had a financial difficulty is raising questions. In addition, the receivables represented 21% of the corporate assets.

The sales manager does not closely follow the sales team but pays them based on estimated sales. There are high chances of paying commissions to these members of staff without making the actual sales (Ecker, Francis, Olsson & Schipper, 2013).

Question Five

The two account receivable confirmations will be applicable for Smackey Dog Food Inc. A positive confirmation will help in confirming the correct balances from the debtors while a negative confirmation will request debtors’ response in cases where they do not agree with the balances. For Smackey Dog Food Inc., a positive confirmation will be more reliable. An inventory confirmation will help in confirming the account receivables.

Question Six

Sample size for confirmation of accounts receivables are affected by the following factors;

The extent to which substantive tests and analytical procedures are able to detect risks affects the sample size. Secondly, the level of control risks and tolerable misstatements will also influence account receivables’ confirmation sample size. Lastly, the type of confirmation and level of inherent risks are also considered in sample size for account receivables’ confirmation.

Question Seven

In order to obtain the necessary evidence on the existing legal encumbrances as well as assessing their any possible liens to the company property, the following activities will be carried out:

First, Keller CPAs will have to conduct analytical procedures to assess the control risks. Secondly, acquisitions and disposals for the current year will be evaluated and verified (DeZoort & Harrison, 2016). The end year balances and depreciation expenses will also be verified. Lastly, accumulated depreciation balances will be verified. These steps will help in ascertaining whether property in question is sold, pledged, or damaged.

Question Eight

It will be important that I attend the end year inventory. This is because my presence in the exercise will not only assure the client of the outcome of the exercise but will also provide me with an avenue to identify some challenges the client have with inventory management. Since I will have to write a report on how Smackey Dog Food Company staff carries out inventory count, I will need to arrange for item recount. Moreover, I will record the items that I feel are not properly reported to enable follow up. I will also record damaged, defective, slow moving items for further inquiry about their status.

Question Nine

Smackey Dog Food Company’s warehousing and inventory cycle are made up of the following functions;

The cycle begins by processing orders that are purchased from the company suppliers. Here documents like supplier quotations, requisition for purchase document, and purchase orders among other documents can be used (Johnstone, Gramling & Rittenberg, 2013). After processing the orders, the next step is to receive the purchased materials from suppliers. Documents like receiving report may be useful at this stage. Requisition form for materials can be used to assess inventory stage. Raw materials processing stage can be evaluated using job and process cost sheets. The last stages are storage ad shipping of final products. Sales and shipping invoices can be used respectively to track the records at tis stages.

Some of the weaknesses in Smackey Dog Food Inc.’s internal control include the following: lack of standard guidelines concerning reporting of goods returned by clients is witnessed. In fact, there are no reports regarding the inventory of returned goods. In addition, the fact that a single person handles the company inventories raises concerns about their internal control system.

Question Ten

It is true that the audit team members are breaching the professional rules of conduct based on their previous acts. First, Pete’s friendship with Kim’s ex-husband and his act of revealing clients’ confidential information to non-audit team member are violating the Rule 101 and 301 of the professional rules of conduct. In addition, Ben’s act of developing a crush towards Anita, the company’s bookkeeper and Maureen’s tendency of over-estimating accounts makes it necessary to question their alignment with the Professional Rules of Conduct and ethical values in auditing (DeZoort & Harrison, 2016).

Question Eleven

The rules governing auditing holds auditing firms responsible for auditors’ failure to detect the presence of material misstatements in financial and inventory reports. Because such actions result into giving incorrect analysis and reports, intentional or unintentional uncovering material misstatements may make an audit firm’s service delivery questionable (Johnstone, Gramling & Rittenberg, 2013). The degree of CPAs’ legal liability concerning the act will be dictated by how the audit team conducted the audit and the level of damage on the company’s net worth caused by reliance on wrong figures in the financial statements.

References

Arens, A. A., Best, P., Shailer, G., Fiedler, B., Elder, R. J., & Beasley, M. (2007). Auditing and assurance services in Australia: an integrated approach. Pearson Education Australia.

DeZoort, F. T., & Harrison, P. D. (2016). Understanding auditors’ sense of responsibility for detecting fraud within organizations. Journal of Business Ethics, 1-18.

Ecker, F., Francis, J., Olsson, P., & Schipper, K. (2013). Estimation sample selection for discretionary accruals models. Journal of Accounting and Economics, 56(2), 190-211.

Grenier, J. H., Pomeroy, B., & Stern, M. T. (2015). The effects of accounting standard precision, auditor task expertise, and judgment frameworks on audit firm litigation exposure. Contemporary Accounting Research, 32(1), 336-357.

Johnstone, K., Gramling, A., & Rittenberg, L. E. (2013). Auditing: a risk-based approach to conducting a quality audit. Cengage Learning.