u Paper format: executive style memo; should be in Word: font: Times New Roman size 12; 1 and ½ line spacing; use footnotes NOT endnotes; cite all sources used); use PowerPoint for the Audit Committee slides and Excel for the Summary of Unadjusted Differences
u Length of paper is as much or as little as you need to cover all the points mentioned in these instructions
o You are an audit senior working on the audit of a large public company that trades on the NYSE
o At year end, you identify deficiencies in your client’s system of internal controls
o Deficiencies include IPE (information produced by entity) errors, year-end inventory count errors, errors in the capitalization of fixed assets, and errors in the calculation of the entity’s Black Sholes model that is used to calculate stock compensation
o Your manager has tasked you with writing a preliminary memo describing these error and evaluating them under GAAS as to whether alone and together they are significant deficiencies or material weaknesses in internal control. In addition to the memo, you must also prepare a summary of unadjusted differences and draft several PowerPoint slides to present your findings and recommendations regarding these deficiencies to the Audit Committee.
o You must provide a preliminary conclusion as to whether they are SDs or MW and evaluate the implications (e.g., reliance on IC, competence of personnel, recommendations to audit committee, etc.--- do not limit yourself to these but consider all relevant implications)
o Then you must describe the actions necessary if you conclude they are SDs or MWs
u Key Facts:
o Client is a 12/31 year end client
o At the beginning of the audit, you concluded to place moderate reliance on internal controls to reduce the nature, timing and extent of procedures prior to discovery of the errors
o Materiality is set at $2 million
o IPE errors identified are $500,000 overstatement of accounts receivable ($450,000) and intangible assets ($50,000) that resulted from the Director of SEC reporting not checking her own work and not being review by her supervisor. The client is headquartered in Denver but the Director works in Albuquerque from home and has no staff to support her.
o Year – end inventory errors identified are $30,000 understatement of assets. During the year-end inventory count, which you observed, the client’s inventory team identified a $30,000 adjustment but failed to record the adjustment prior to the 2018 books being closed. The audit team caught this error; the client did not.
o Fixed asset capitalization error are $20,000 understatement of assets and you determined, in conjunction with the Chief Accounting Officer, that the error was caused by the incompetence of the fixed asset accountant. He is under a great deal of stress for health reasons and is not performing up to expectations.
o Stock compensation expense is $2.2 million understated because the Director of SEC reporting in Albuquerque made incorrect assumptions in the Black Sholes model , she did not check her work and it was not reviewed by anyone else.
o These errors were caught by the audit team during the audit
o You must first evaluate the errors alone and taken together leading to your conclusion as to MW or SD
o GAAS for PCAOB audits is found at https://pcaobus.org/Standards/Auditing/Pages/default.aspx and in your text book
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