ACCT555 - External Auditing

Worksheet for You Decide
Name ____________ Course Code _________ Grade ___/ Date__/__/__
Questions:
Q1: Discuss how the SEC has influence (if any) over the audit of Smackey Dog Foods, Inc.
Solution:
The SEC puts the obligation on the auditors of Smackey Dog Foods, Inc. to comply with specific
auditing standards in order to maintain the required audit independence. The American Institute of
Certified Public Accountants (AICPA) provides the auditors with six ethical principles that must
be adhered to (sec.gov, 2020). Maintaining the audit independence is one of the most important
principle. The other ethical principles that the auditors need to follow in the audit of Smackey Dog
Foods, Inc. are responsibilities, service the public interest, objectivity, integrity, due care and scope
and nature of services. While conducting the audit of the company, the auditors are need to ensure
that they are free from conflicts while maintaining overall audit objectivity through correct
discharge of audit responsibilities. They need to be independent from mind as well as from
appearance while performing audit. The Sarbanes-Oxley Act 2002 puts the obligation on the
auditors to maintain overall objectivity and independence in the audit as non-compliance can lead
to legal actions against them. All these requirements of SEC are applicable for both the private
companies and public companies. Therefore, all these significantly influence the audit of Smackey
Dog Foods, Inc.
Q2: Discuss the essential activities involved in the initial planning of an audit. How do these all
specifically to the Smackey Dog Food client?
Solution:
There are five essential activities involved in the planning of an audit that include the audit of
Smackey Dog Foods, Inc. They are as follows:
 The first activity is to acquire necessary information to understand the business and
industry of the client. The auditors of Keller CPAs are required understand Smackey Dog
Foods, Inc. and its industry by applying their audit experience in other foods companies.
 Assessment of the business risks of the clients is the second crucial activity. The need for
the auditors of Keller CPAs is to examine the presence of material misstatements in the
financial statements of the company due to any business risk.
 The third essential step is to undertake preliminary analytical procedures. This requires the
auditors in comparing the performance of Smackey Dog Foods, Inc. with the information
of the industry so that the risk areas can be recognized.
 The fourth step is setting level of materiality while assessing acceptable inherent audit risk.
This totally depends on Smackey Dog Foods, Inc’s auditors judgments while considering
all the required aspects.

 The last crucial step is the development of overall audit program and plan. This is done to
acquire reasonable assurance so that appropriate audit opinion can be formed (Bishop,
Hermanson & Houston, 2013).
Q3: Discuss the 4 stages of the audit and the major activities performed by the auditor in each
phase. Give an example of how each of these specifically applies to the Smackey Dog Food, Inc
audit. For instance, examine the apparent internal control weaknesses and possible negative
outcome of each.
Solution:
The following discussion shows the stages stages of audit in respect to Smackey Dog Foods, Inc.:
Planning and Assessment of Risk – Comprehending the business and the sector in which
Smackey Dog Foods, Inc. operates is helpful for the auditors in the initial assessment of its risks.
Moreover, the auditors need to assess and analyze its whole internal control mechanism for the
assessment of control risk for the assertions associated with transactions such as classification,
accuracy, completeness, occurrence and others.
Test of Control – The audit team of Keller CPAs are needed to perform the tests of controls
through the examination of relevant records, documents and reports that the company maintains
along with enquiry to the employees. Moreover, the auditors are required to observe inventory
control related activities for the returned inventories of Best Boy Gourmet.
Substantive Audit Procedures – The audit team of Keller CPAs are responsible for undertaking
substantive audit procedures for the accounts of inventory and accounts receivable. The auditors
also have the option to undertake the substantive audit procedures through the analysis of the tests
of transactions, test of details of the balances with audit risk and testing the accounting
transactions.
Audit Finalization – This is the stage where the audit team from Keller CPAs collects all the
information by developing and sending a report to the management of Smackey Dog Foods, Inc. in
order to attract their attention to the matters that are of significant in the audit of the company. This
step involves in issuing the appropriate audit opinion on the basis of the assessment of the
collection audit evidence (Vaicekauskas & Mackevičius, 2014).
Q4: Describe Keller CPAs’ responsibilities related to communications regarding internal control
matters. What internal controls issues do you identify?
Solution:
The key responsibility of the CPAs is the communication of identified important insufficiencies
and material issues to the clients’ managements and those charged with governance. These issues
need to be communicated in writing.
There are certain internal control issues within Smackey Dog Foods, Inc. identified in the audit and
they are as follows:
 The first issue is the use of estimated sales for providing commission to the sales persons.
This leads to the threat of the payment of commission to the sales persons on sales that are
never made. The absence of refund of commission for this sales makes the risk worse.

 The second issue can be seen in segregating duties to handle inventory. There is a high
chance of material misstatements in inventory in the presence of only one person
accountable to prepare and approve all inventory records.
 The third issue is in the absence of internal control mechanism to tackle the returned dog
foods as this creates the scope to the employees to take these returned goods home.
 The last issue can be seen in the absence of proper internal control mechanism in making
accounts receivable. This is crucial in the presence of financial difficulty of the major
accounts receivable account holder clients (Daniela & Attila, 2013).
Q5: You decide that you will address Smackey Dog Food, Inc.’s accounts receivables through
confirmations. Discuss the various types of confirmations and what forms you will implement and
why.
Solution:
The presence of two types of communication can be seen in case of accounts receivables; they are
positive confirmation and negative confirmation.
Positive Confirmation – Positive confirmation associated with accounts receivable is considered
as the type of confirmation where the auditors directly ask the debtors that whether the balance of
their accounts receivable amount are appropriate or not. Widely used instances of positive
confirmation of accounts receivable are the use of invoice confirmation forms and blank forms.
Negative Confirmation – It is different from the aspect of positive confirmation as a negative
confirmation of the accounts receivable requires the debtors to respond when they are not agreed
with the recorded amount of accounts receivable in the accounts receivable confirmation form
(Miculescu & Grui, 2018).
In order to obtain the required confirmation from the debtors of Smackey Dog Foods, Inc., it is
required for the audit team of Keller CPAs to implement invoice confirmation form that is
considered as the positive confirmation method. Since the accounts receivables have obtained a
large part of sales and the clients are facing financial difficulties, it is needed to directly ask the
debtors about the appropriateness of their balances (Monroe & Hossain, 2013).
Q6: What are the major factors affecting sample size for confirming accounts receivable?
Solution:
There are certain factors having influence on the sample size at the time to confirm the balance of
accounts receivables. These are as below:
 Inherent risk affects the sample size due to its dependency on the size of total accounts
receivable, results of previous years, predictable misstatements and account numbers.
 Control risks within the client organizations in the absence of appropriate internal control
mechanism affects the sample size.
 Material misstatements in the financial statements affect the same size for confirming the
balance of accounts.
 Detections risks that the auditors achieve on the basis of the substantive audit procedures
affect the sample size in order to confirm the balance of accounts.