Assignment 1: Understanding the Client and Performing Analytical Procedures Due Week 2 and worth 100 points In this assignment, you will prepare a two to three (2 to 3) page report that addresses th
Audit Decision Cases King Companies, Inc. Question C4.1 is based on the following case. King Companies, Inc. (KCI) is a private company that owns five auto parts stores in urban Los Angeles, California. KCI has expanded 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 and CEO of KCI, 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, Eric 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 company's 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 KCI's 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. Patricia trusts the company's 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 the accounting staff enjoys 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. The 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.
Question C4.2 is based on the following case. Mobile Security, Inc. (MSI) has been an audit client of Leo & Lee, LLP for the past 12 years. MSI is a small, publicly traded aviation company based in Cleveland, Ohio, where it manufactures high-tech unmanned aerial vehicles (UAV), also known as drones, and other surveillance and security equipment. MSI's products are primarily used by the military and scientific research institutions, but there is growing demand for UAVs for commercial and recreational use. MSI must go through an extensive bidding process for large government contracts. Because of the sensitive nature of government contracts and military product designs, both the facilities and records of MSI must be highly secured. The MSI board of directors consists of 12 members. The CEO and CFO are board members, and the remaining 10 board members are not employees of MSI. One of the board members, who is part of the audit committee, is stepping down next month, so MSI is looking to fill that spot. C4.2 Audit committees a. Gather information: As MSI is looking for someone to fill the vacant board position, what requirements must be followed? What characteristics or qualities would be ideal for the board member to have? b. Gather information: Go to www.pcaobus.org and access AS 1301 Communication with Audit Committees. Discuss specific items the auditors must communicate with the audit committee before the audit begins. (Note: Do not discuss the auditor's requirements for communicating the results of the audit.) Brookwood Pines Hospital Question C4.3 is based on the following case. Goodfellow & Perkins LLP is a successful mid-tier accounting firm with a large range of clients across Texas. During 2022, Goodfellow & Perkins gained a new client, Brookwood Pines Hospital (BPH), a private, not-for-profit hospital. The fiscal year-end for BPH is June 30. Goodfellow & Perkins is performing the audit for the fiscal year-end June 30, 2023. BPH provides medically necessary care to patients, regardless of their ability to pay. Both uninsured and underinsured patients are offered discounts of up to 100% of charges based on their income as a percentage of the federal poverty-level guidelines. BPH does not pursue collection of these accounts; therefore, they are not reported in patient service revenue and accounts receivable. The cost of providing the charity care is included in operating expenses. BPH's investments consist of mutual funds, common equities, corporate and U.S. government debt issues, state and municipal government debt issues, and trusts. A majority of the investments are the result of charitable contributions to the hospital by generous donors. Earnings from the investments are used to cover the costs of the charity care. BPH is also eligible for certain government grants to help cover the costs of the charity care. Selected financial statements and other financial information are provided below. Since BPH operates as a non-for-profit, it reports assets, liabilities, and net assets. (Note: Net assets takes the place of equity since there are no owners.)
C4.3 Analytical procedures Analysis: Using BPH's financial data, perform analytical procedures to gain an understanding of BPH. Conduct a trend analysis, common-size analysis, and ratio analysis. Based on your analysis, document in a memo your understanding of the client, potential problem areas (accounts at risk of material misstatement), and any other special concerns. (Note: Some ratios provided in the text may need to be modified for a not-for-profit organization. If necessary, use the internet for additional research about financial ratios used in the hospital industry.) Cloud 9 - Continuing Case Part 1: Gain an Understanding of the Client W&S Partners began the planning phase of the Cloud 9 audit. As part of the risk assessment phase for the new audit, the audit team needs to gain an understanding of Cloud 9's structure and its business environment, determine materiality, and assess inherent risk. This will assist the team in developing an audit strategy and designing the nature, extent, and timing of audit procedures. Required Answer the following questions based on the additional information about Cloud 9 presented in the appendix to this text and the current and earlier chapters. You should also consider your answer to the case study questions in earlier chapters where relevant. Your task is to research the retail and wholesale footwear industries and report back to the audit team. Your report will form part of the overall understanding of Cloud 9's structure and its environment. You should concentrate your research on providing findings from those areas that have a financial reporting impact and are considered probable given Cloud 9's operations. Use the factors listed in Illustrations 4.2 and 4.3 as a guide for your research. Part 2: Analytical Procedures Required Answer the following questions based on the information presented for Cloud 9 in the appendix to this text and the current and earlier chapters. You should also consider your answers to the case study questions in earlier chapters. a. Using analytical procedures and the information provided in the appendix, perform an analysis of Cloud 9's financial position and its business risks. Discuss the ratios indicating a significant or an unexpected fluctuation. b. Which specific areas do you believe should receive special emphasis during your audit? Consider your discussion of the analytical procedures results as well as your preliminary estimate of materiality. Prepare a memorandum to Suzie Pickering outlining potential problem areas (that is, where possible material misstatements in the financial statements exist) and any other special concerns.