Week 3 Team Assignment - TUTOR JANE
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WEEK 2 TEAM ASSIGNMENT
Week 2 Team Assignment
Learning Team C:
Leigha Covington, Lauren Immel, Melissa Simmons, and Toni Winiavski
ACC/492
January 30, 2017
Ding Hardin
When conducting audits, it is important to follow specific auditing procedures to ensure accuracy and quality. To provide the best type of audit we must create steps for each type of account in sub-steps to ensure that the system that conducts the audit provides accurate reports. The types of accounts that we should audit will be cash, Financial instruments such as cash counting machines registers or anything their processes the transactions, sales audit, receivable accounts audit, and the types of Cycles. Each step in all audits contains work programs that help determine if the systems are fully integrated within each other to communicate effectively for the program to work.
Audit
Understand what needs to be audited.
Get proper documents to audit
Copies of the company’s incorporation documents
Chart of accounts:
Organization chart
Internal control documentation
Stock and bond issuances
Prior years’ analytical procedures
Create audit plan
Cash
List of all users who handle cash
List of transactions and receipts
Confirm accuracy of records
Find errors or test for errors
Make sure all cash/ sales have been finalized
Collect bank records/ deposits with receipts
Accounts receivable records/ checks that have been processed
Debts are satisfied
Update loss prevention
Review Financial Instruments
Assess types of financial instruments
Determine what type of audit procedures should be used (AICPA standards?)
Review cash flow to understand the total usage of instruments
Review activity logs; security/ checkpoint logs; user logs
Make sure data is backed up/saved
Sales Audit
Gather data to be reviewed
Review sales process
Review sales cost against sales revenue
Evaluate system for effectiveness of a sale process
Review internal structure to find strengths and weaknesses
Review records
Accounts Receivable
Review general ledger
Make sure journal entries match and are detailed
Test and review invoices to make sure accounts have been billed correctly
Write off bad debts
Make sure sales were processed in the correct financial period
Create a trend analysis
Cycle audit to ensure cycle is not providing redundant info
Finalize audit
Review audit
Present results
AUDIT PROGRAM FOR SALES
External customer confirmations
Test the balances confirmed against general ledger balances
Confirm that sales are recorded in the proper periods
Review invoices and shipping documentation to evaluate timing
Accounts Receivable includes all balances owed to the entity at reporting date
Test invoices that were issued around period closing date to evaluate timeliness
Accounts receivable balances are owed to the entity and not outside parties
Test general procedure to ensure completeness
Test of confirmed external balances
Test by general inquiry of company personnel
Sale and accounts receivable are in proper periods
Cut off tests to ensure proper posting
Accounts receivable are presented at the correct amounts
Testing of unit prices versus quantities shipped
Review of company procedures for aged receivables
Accounts receivable are correctly described and classified on the financial statements
Testing of transactions and follow through to general ledger
Review the draft financial reports
Specific Risks and Nature of Company
Inherent risk is when misstatement is greater for some assertions and related financial balances or classes than for others. Comparatively it is much easier to misstate in a complex calculation than simple calculations. More so cash is more susceptible to theft. In this case the risks include inventory overstatement. Supply and demand is another fact that potentially leads to inherent risk of Korger Co. Supply and Demand deals with fundamental commodity business thus putting its earnings and operations at risk when the market price of beverages, food, and household items change. Lastly economic conditions just like any another retail store, demand all over the country has a mutual relationship with the growth rates of the economic in general. Control risk is how misstatement materials could occur in assertion, but could not be prevented by internal controls. These kinds of risks basically function per the implementation of a well-designed and effective system and its operation on internal controls. This kind of risk mostly exists due to internal control limitations.
Brief Summary
When auditing the general cash ledger, it is important for auditors to determine if the Company has adequate internal controls to rely on for test of details and sampling. If Kroger has effective internal controls, the audit of the cash receipts and disbursements should be tested to prove the following audit assertions: completeness, valuation and accuracy, existence, and classification. For the test of details with cash receipts, the auditors should trace a sample of invoices to the cash receipts and deposit slips. For the cash disbursements, the auditor should trace a sample of cancelled checks to the cash disbursement journal. By establishing a cutoff period both shortly before and after year end, the auditor can compare the dates and recordings from a sample of cash receipts with the dates deposited in the bank to the dates the checks cleared the bank. To test for valuation, the auditor should voucher a sample with either a purchase order, invoice, or cancelled check with the cash disbursement journal. The auditor should also voucher a sample of entries in the cash receipts journal with deposit slips and the bank statement to test for existence. Bank confirmations and reconciliations support the substantive audit procedures related to the cash account. The auditors should all ensure that all required disclosures related to the cash account are included in the financial statements.
When auditing financial instruments and other investments, internal control requires strong segregation of duties much like the cash account. Generally, the tests of details when auditing financials instruments are focused on the ending balance in the investment accounts, presentation, and proper disclosure. The auditors will perform substantive tests to determine if the following audit assertions have been meet: completeness, valuation and allocation, existence, and rights and obligations. It is important for the auditor to obtain corroborating evidence for fair value at year end to the values reported on the balance sheet date. Confirmations should be requested from a third party such as a broker for the securities, and the auditor should examine the investments such as securities on had to ensure they coincide with the testing of other assets such as cash. This testing prevents the possibility of the company’s concealing a theft with financial instruments.
January 31, 2016 revenues increased $1.5B. Kroger Company sales are rising due to acquisition of many different competing brands in the market place and less competition in geographical areas. A sample size of 106 was used to make verification of cash receipts to ensure proper accountability on the financial statements and all areas appear to be accurate through our findings. Kroger Company’s cost of revenue decreased $100M in January 31, 2016. Many of the long-term debts were deferred to the deferred long term liabilities account. This would lower the current liabilities and debt making the cost of revenue diminish. Management should review the need to defer long term debt as this could have negative impacts on future financial statements. Management should work to not defer as much long term debt and possibly look at their aggressive style of acquisition and come up with a possible alternative to deferring debt which could show a company is financially strapped for cash. Kroger Company reported a $1.3B gain in Net Income in January 31, 2016. Kroger Company deferred many long-term liabilities freeing cash flow for the present, this could be troublesome for the future of Kroger as the deferral of long term liabilities not only defers the liabilities but also adds interest onto those same liabilities. Kroger should re-examine the decisions to defer so many long-term liabilities and should concentrate on select liabilities that were deferred to ensure that Kroger does not owe more on these liabilities in the future. Kroger Company reported $9M gain in cash and cash equivalents in January 31, 2016. Cash flows were evaluated by completing cash flow testing to track the movement of Kroger’s cash from prior years. NOTE: Given Kroger’s aggressive acquisition of competition cash flow is important and this cash flow has been validated to comply with GAAP. Kroger Company had an increase in retained earnings of $1.644B in January 31, 2016. The increase in retained earnings was increased by the increased net income on the income statement. The analysis of retained earnings to total assets is 41% ratio. In a perfect world, the Kroger Company would want to be at 100%. The period prior (2014-2015) the Kroger Company had a 40.5% ratio showing some change to the positive, but causing a closer look at policies that enable Kroger to finance their own asset growth. Plans to defer long term debt to free up cash flow brought questions as to the future intentions of Kroger and their aggressive acquisition style and the acquisition of more debt due to these acquisitions.
As stated it is important to follow procedures when doing an audit. Following the steps of the plan that was created for the audit will ensure that audit is done correctly and that nothing is missed. Cash is one of the most difficult to audit because of the many different types of cash accounts. It is also important to not only review the financial statements but also to ensure that they are legitimate.
Reference Page
Kroger Co. Form 10-K. (2016). Retrieved from:
http://ir.kroger.com/Doc/Index?did=35909978
