ACCT 4400
Individual Assignment: Audit Planning
Assignment
Background: Capstone Core Objective Assessment
This assignment involves planning the audit for a
hypothetical audit client, and serves as a capstone assessment. By completing
this assignment, you will demonstrate each of the following core objectives:
·
Critical Thinking Skills (CT) – to include creative thinking, innovation, inquiry, and analysis,
evaluation and synthesis of information
·
Communication Skills (CS) – to include effective development, interpretation and expression of
ideas through written, oral and visual communication
·
Empirical and Quantitative Skills (EQS) – to include the manipulation and analysis of numerical data or
observable facts resulting in informed conclusions
·
Social Responsibility (SR) – to include intercultural competence,
knowledge of civic responsibility, and the ability to engage effectively in
regional, national, and global communities
The information
and questions needed to complete this assignment begin on page 2.
2015 Audit of Gamma
Industries: Summary of Information
Assume you are an audit manager, today is April 15, 2015,
and your public accounting firm is currently planning the 2015 financial
statement audit of Gamma Industries, a public company using a 12/31 year-end
(for this assignment, focus only on the financial statement audit). Gamma is a
new client for your firm. Gamma manufactures medical equipment, and sells these
machines to hospitals, out-patient surgery centers, and medical offices. The
audit partner has asked you to help plan the audit for this new client using the
following information obtained and summarized by the engagement team:
- Ross Parker has been
Gamma’s CEO for five years, and previously served as an executive vice
president at Gamma for seven years. Before joining Gamma, Mr. Parker
worked as an account manager at an advertising agency. A routine
background check revealed one legal issue for Mr. Parker: he was arrested in
1998 for driving while intoxicated, but the case was dismissed on a
technicality. - Emily Fielder, CPA, is Gamma’s
CFO and a former auditor. Mrs. Fielder has worked at Gamma in various
positions for nearly two decades, and has been CFO for six years. - While Mr. Parker and Mrs.
Fielder have provided consistency in the CEO and CFO positions,
respectively, Gamma has experienced significant turnover among its
accounting personnel. The majority of the current accounting staff do not
have accounting degrees, although both the controller and chief accounting
officer have master’s degrees in accounting. - Gamma received a qualified
financial statement opinion for its 2014 financial statements from the
predecessor audit firm. Mr. Parker explained that this opinion was due to
disagreements over a subjective accounting estimate, the allowance for
doubtful accounts. Communications with the predecessor audit firm, which
are required by standards, were consistent with his explanation. These disagreements
led the predecessor audit firm to resign after completing the 2014 audit. - The company’s executives
receive a base salary and incentive-based compensation such as stock
options and bonuses. For accounting and financial services personnel,
Gamma implemented a policy last year that combines years of service and
corporate performance to encourage stability and limit turnover. Due to
this policy, Mrs. Fielder will receive a very large bonus if the company
meets its 2015 Basic EPS forecast because she will pass twenty years of
service late in 2015.
This morning, the audit senior for the Gamma audit, Eric
Wall, disclosed to you that his aunt owns a material (to her) amount of Gamma’s
common stock. Eric told you he does not believe his independence is impaired
and wishes to stay on the Gamma audit.
Please see the accompanying Excel file for Gamma’s 2014
financial statements.
Questions to Submit
to the Professor
These questions
address issues related to audit planning such as analytical procedures,
inherent risk assessment, and audit engagement staffing. Per the syllabus, you
must submit two versions: hard-copy in class on the due date and an electronic
version through Turnitin via Blackboard. You must also record the multiple
choice questions on the scantron provided by your instructor.
Questions
Part 1: Analytical
Procedures using the 2014 Financial Statements
- An auditor calculating Gamma’s
quick ratio should exclude which of the following item(s) from current
assets? - Cash and equivalents
- Inventory
- Prepaid Expenses
- B & C only
- The numerator of Gamma’s
receivables turnover is equal to - Eighty percent of Gamma’s
net sales - Gamma’s cost of sales
- Gamma’s net sales
- An auditor calculating
Gamma’s gross profit percentage should calculate gross profit as a
percentage of - Eighty percent of Gamma’s
net sales - Gamma’s cost of sales
- Gamma’s net sales
- An auditor calculating
Gamma’s times interest earned ratio should include which financial
statement item in both the
numerator and denominator? - Interest expense
- Net income
- Notes payable
- Assuming a 360 day year,
Gamma’s days outstanding in accounts receivables is __ days. - 66.94
- 67.87
- 73.89
- Gamma’s net profit margin is
__ %. - 3.49
- 5.68
- 8.45
- Gamma’s return on equity
(ROE) is __ %. - 0.81
- 3.02
- 4.57
- Gamma’s quick ratio is
- 0.30
- 2.72
- 4.62
- Assume Gamma’s usual
credit terms are 2/10, net 30. Gamma’s days outstanding in accounts
receivables suggests bad debts are likely __ to accounts receivable. - Immaterial
- Material
- Neither A nor B: Bad
debts have no relationship with accounts receivable
- Gamma’s profit margin,
relative to the industry of average of 17.43%, suggests a __ level of
detection risk. - Low
- High
- Neither A nor B: profit
margin is irrelevant to assessing detection risk
- Gamma’s ROA, relative to
the industry average of 13.3%, suggests a __ level of inherent risk. - Low
- High
- Neither A nor B: ROA is
irrelevant to assessing inherent risk
- Gamma’s current ratio may
be distorted because the company - Has not fully depreciated
and amortized all of its fixed assets - Did not present diluted
EPS in its financial statements - Likely has a high level
of bad debts
Part 2: Inherent Risk
(IR) Assessment
- List four issues
from the summary information on p. 2 that could impact IR at Gamma
- Consider Gamma’s
accounting and financial services personnel, including the controller,
chief accounting officer, and CFO. What is your assessment of the
collective competence of these employees? How does this assessment impact
IR?
- What impact, if any, does
the CEO’s (Mr. Parker) driving while intoxicated arrest in 1998 impact IR?
Explain your answer.
- What is your IR
assessment? Support your conclusion using both the summary information in
this document and the 2014 financial statements, including the analytical
procedures you performed in Part 1.
Part 3: Audit
Engagement Staffing
- Describe your
responsibility to the public interest in considering Eric’s issue? How
does this responsibility impact your consideration of whether to remove
him from the Gamma audit?
- Will you allow Eric to
serve on the Gamma audit? Explain your reasoning, including how investors
and regulators might view his participation on the audit.
- If the average auditor in
practice was in Eric’s position and was allowed to stay on the Gamma
audit, could this person be objective (be sure to explain your answer)? What
specific advice would you give this person on how to maintain her/his
objectivity?
