Second year performing audit, previously audited by CwP LLP
Order ID: 89JHGSJE83839 Style: APA/MLA/Harvard/Chicago Pages: 5-10 Instructions:
Risk profile Client acceptance
Risk Profile High Risk
Key findings:???
Second year performing audit, previously audited by CwP LLP (Big 4)
New CFO, previous experience of 14 years at YE LLP (Big 4)?
Large amount of debt.? Payments are due starting in 2016. Bank covenants (requirements) state that they must receive audited financial statements
DRI is in a stable industry of paper and brochures, history of net income and improved revenue, however, many companies are eliminating the need for hard copy brochures and business cards and turning to electronic forms of information communication.? Management is having a more focus on introductions via email, rather than business cards.?
Understand the business Background
Email from Audit Partner to you:
To:? Audit team
CC:??
From:? Jim Partner, CPA of Gauchos LLP
Re:? Team Planning Event and Risk Assessment
Dear Audit team:
Welcome to the audit team for DRI.? My name is Jim Partner.? I have been with Gauchos LLP for 22 years.? Currently I am on vacation in Aruba with my family, but thought I would check some emails and send some new information to you to help get started.? We have our team planning event in a few days, so you should have all of the risk assessment steps of our audit complete prior to this.?
This year, DRI has hired Scott Fulkerson, as their CFO.? I used to know Scott back in our golf days when we used to tour the world and compete in junior golf tournaments.? He was a pretty good golfer (no Tiger Woods), but honestly I felt when people werent looking he was improving his position by moving his ball without others knowledge.? He was never caught, but I always had a hunch.? However, that was in the past and based on his current resume, he worked at a public accounting firm for 14 years and has a history of public and private company experience as well as IPO experience.? Rumor has it that he turned down an offer to make Partner because he indicated he would rather make less money and work more hours at DRI.? We have completed the background check on Scott utilizing our forensic team and found nothing unusual.?
The Company has continued to borrow debt in the current year which has increased how much debt the Company has. ? This is common for companies such as DRI as they continue to grow and expand they will borrow from the bank to grow the business through either asset purchases or purchasing competitors businesses. We have seen several new business combinations from DRI in the last few years including the current year Brophy Brothers Brochures acquisition.? Rumor has it that they have their eyes on a Monster acquisition in the future.?
For our team planning event, I would like you to interview the CFO about the current status of the business.? However, you should probably review the financial statements and ask for preliminary changes in the balance sheet and income statement to see if there are any new areas or areas of concern for the audit this year. ? After gathering this information, you should identify what you think are the:
Inherent risks of the business/industry
Significant risks that the Company may have
Fraud risks – where you believe if someone was to commit fraud, where and how would they do it.
Lastly, we cant do an audit unless we have a planning materiality level.? Please utilize our firms methodology to determine what our planning materiality, tolerable testing threshold and our summary of audit differences (SAD) nominal posting scope should be.?
Ok, time to finish my pina colada.? Enjoy working while I finish improving my tan.? Dont stay too late.?
Jim
Planning Materiality
Prepare a preliminary materiality levels based on the pre-audited balance sheet and/or income statement received from the CFO.? This is attached in this file.?
???????BS and IS
Utilize the firm methodology to select a financial metric to use for materiality.? You should determine three numbers.??
PM – The first is known as a planning materiality (PM).? This is the threshold that is considered a material misstatement (one which would be significant enough to materially influence or change the opinion of an investor if the financials were wrong by this amount).??
PM is usually set using a metric that is what the users of the financial statements evaluate the earnings of a Company.? If the Company is making money, this will typically be an earnings metric (Pretax income, EBIT, or EBITDA).? If they are at a net loss then potentially an auditor would look at another basis such as Assets or Equity or Revenue.?
Hierarchy of best form of metric to use for PM:
Range
Pretax income
5-10%
EBIT (Earnings Before Interest and Tax)
5-10%
EBITDA (Earnings Before Interest, Tax, Depreciation and Amortization)
1-5%
Revenue
0.5% to 1%
Asset
0.5% to 1%
Equity
1% to 3%
TE The second is what is known as your testing threshold or Tolerable Error (TE).? This is usually set at either 50% of PM or 75% of PM.? If there are more risks identified, changes in management, significant transactions during the year it should be at 50%.?
SAD The summary of audit difference (SAD) amount is known as a nominal amount and would be an amount that if an auditor finds to be different than the information obtained would be asked to be fixed.? Although much smaller than PM, these amounts could add up and eventually be more material so to ensure the financial statement are recorded correctly it is the auditors goal to get all SAD entries recorded.? However, the client may not always record these.? This amount is set at 5% of PM.?
Determine PM:?
Prior year PM?
Planning Materiality (PM) at 5% Pretax Income *
$330,000
Tolerable Error (TE) @ 50% of PM *?????????????????????????????????????????????????????????????????????????????????????????????
$165,000
SAD (Nominal posting amount)? 5% of PM????????????????????????????????????????????????????????????????????????????????????
$16,500
* Due to first year audit, Gauchos LLP defaulted to the low end of the range for both PM and TE.?
Current year PM (Please complete)
Metric used:
% used:
Amount
Planning Materiality (PM)?
Tolerable Error (TE)?
SAD (Nominal posting amount)? 5% of PM????????????????????????????????????????????????????????????????????????????????????
5%
Metric used for PM and why?? (Please complete)?
% used for PM and why? ? (Please complete)?
% used for TE and why? (Please complete)?
Planning Analytics
Based on your assessment of PM and TE, perform a planning analytics review by calculating the change and percent change in the balance sheet and income statement balances from the prior year and investigate changes greater than TE and 10%.? Determine which accounts need an explanation and then inquire with CFO, Scott Fulkerson.? Utilize the Balance sheet and income statement attached above to fill in your notes.? (Please complete in attached excel file in planning materiality section)
Identify the Risks?
Based on your understanding of the client and the environment, document what risks you believe are present for the Company.??
IR (inherent risks) are risks that are inherent in the industry.??
SR (Significant risks) are risks that are significant to the Company and where errors may occur.??
FR (Fraud risks) are areas where you believe management may be fraudulently manipulating the financial statements.??
Note:? Identify the two most relevant risks for each category and what account they affect (balance sheet and/or income statement account they may impact) and these will be discussed at the Team Planning Event to determine (Please complete):
IR1 Consumer demand may change and customers may shift their focus and no longer print hard copy brochures and change to electronic forms.? Business cards are becoming more and more obsolete with introductions via email. ? (Inventory)
Scope in the accounts being tested in simulation (Please complete):
RUBRIC
Excellent Quality
95-100%
Introduction 45-41 points
The background and significance of the problem and a clear statement of the research purpose is provided. The search history is mentioned.
Literature Support
91-84 points
The background and significance of the problem and a clear statement of the research purpose is provided. The search history is mentioned.
Methodology
58-53 points
Content is well-organized with headings for each slide and bulleted lists to group related material as needed. Use of font, color, graphics, effects, etc. to enhance readability and presentation content is excellent. Length requirements of 10 slides/pages or less is met.
Average Score
50-85%
40-38 points
More depth/detail for the background and significance is needed, or the research detail is not clear. No search history information is provided.
83-76 points
Review of relevant theoretical literature is evident, but there is little integration of studies into concepts related to problem. Review is partially focused and organized. Supporting and opposing research are included. Summary of information presented is included. Conclusion may not contain a biblical integration.
52-49 points
Content is somewhat organized, but no structure is apparent. The use of font, color, graphics, effects, etc. is occasionally detracting to the presentation content. Length requirements may not be met.
Poor Quality
0-45%
37-1 points
The background and/or significance are missing. No search history information is provided.
75-1 points
Review of relevant theoretical literature is evident, but there is no integration of studies into concepts related to problem. Review is partially focused and organized. Supporting and opposing research are not included in the summary of information presented. Conclusion does not contain a biblical integration.
48-1 points
There is no clear or logical organizational structure. No logical sequence is apparent. The use of font, color, graphics, effects etc. is often detracting to the presentation content. Length requirements may not be met
You Can Also Place the Order at www.collegepaper.us/orders/ordernow or www.crucialessay.com/orders/ordernow