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Sec Has Influence - Smackeys Dog Food

Essay by   •  August 9, 2011  •  Case Study  •  2,180 Words (9 Pages)  •  4,251 Views

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Q1: Discuss how the SEC has influence (if any) over the audit of Smackey Dog Foods, Inc.


The SEC has a great influence on the audit of Smackey Dog Foods, Inc. since the company is going public. Independence is first and the most important rule of professional conduct (Rule 101 -Independence, AICPA). That means that audit team members are required to be independent in fact and appearance when providing auditing and other attestation services, be free of conflicts of interest when exercise professional duties and be objective. According to the Sarbanes- Oxley Act, section of SEC and PCAOB independent rules auditors have to be objective and independent otherwise they may bring legal sanction upon themselves.

Although the above standards are enforceable for the audit of public companies, it's also relative to private company which will be going public like 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?


There are several essential activities involved in the initial planning of an audit and how they apply to Smackey Dog Food, Inc. After the decision to accept the client has been made and initial audit planning has been performed, next steps are:

* Understand the client's business and industry. The nature of client's business affects client business risk and risk of material misstatement in the financial statements. Unfortunately, members of the Audit team, the audit manager Pete and two audit staffers Ben and Maureen, have no experience with the client's business and industry, although they may have some knowledge from their previous work if they ever have been involved in audit of food processing/distributing companies and that will be helpful.

* Assess client business risk. Business risk is the risk that Smackey will fail to achieve its objectives. At this point the audit team assesses the risk of material misstatements arising from Smackey's business risk. For example, Smackey's Best Dog Gourmet line presents a lot of business risk because of its fresh, raw ingredients which are more difficult to get in the winter months, and though the demand is high there have been waste issues, and therefore risk of material misstatement.

* Perform preliminary analytical procedures. Keller CPAs needs to compare Smackey's ratios with the industry to provide an indication of the company's performance. These analytical procedures can reveal unusual changes in ratios compared to prior years, and help the audit team indentify areas with increased risk of misstatements that require further attention during the audit.

* Set materiality and assess acceptable audit risk and inherent risk. Smackey's audit team now has to set the acceptable level of materiality. Accounting and auditing standards do not provide specific materiality guidelines to practitioners. Smackey's net income, or sales, or gross profit should be taken as a primary base for setting materiality level as this level is purely a relative and subject to auditor's judgment.

* Develop overall audit plan and audit program. The audit plan and program aims to achieve the audit risk objectives of the audit team and to provide reasonable assurance and basis for the audit report and opinion.

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.


The four stages of audit and how each of the major activities specifically applies to the audit of Smackey Dog Food, Inc.:

1. Planning and design an audit approach. For Smackey, the risks can initially be assessed by obtaining understanding of Smackey's business and its industry. More specifically, the design and implementation of the their internal control procedures, processes and systems are studied and analyzed by the audit team to be able to assess the control risk for each of the transaction-related audit objective - occurrence, completeness, accuracy, classification, timing and posting and summarization and assess risk of material misstatement.

2. Perform tests of control and substantive tests of transactions. The audit team can perform tests of controls by making inquiries of appropriate client personnel, examining documents, records, and reports maintained by Smackey, observing control-related activities such as the one done for the inventory procedures for returned Smackey Dog Food's regular line of product, and reperform client's procedures, verifying the monetary amounts of transaction (substantive tests of transactions).

3. Perform analytical procedures and test of details of balances. The Smackey's audit team analyzes whether the account balances or other data appear to be reasonable. They might examine sales transactions in the sales journal for unusually large amounts and also compare monthly sales with prior year. Audit team will also do tests for monetary misstatements in the balances in the financial statements.

4. Complete the audit and issue and audit report. At this stage, the audit team completes the all the procedures, combines all the information obtained to reach an overall conclusion as to whether the financial statements of Smackey Dog Food Inc. are fairy presented. Once the audit is complete audit opinion must be issued based on the evidence obtained.

Q4: Describe Keller CPAs' responsibilities related to communications regarding internal control matters. What internal controls issues do you identify?


In audits of nonpublic companies, because they are not subject to Section 404 and PCAOB, there is no requirement for an audit of internal control over financial reporting. The audit team, therefore, focuses on internal control only to the extent needed to do a quality audit of financial statements. The auditor is required by auditing standards (AU 325) to issue a written report on significant deficiencies and material weaknesses in internal control to those charged with governance and management, the same as for public companies. One of the big issues in Smackey Dog Food, Inc. is that a personal interest in the organization and a close relationship with personnel make careful evaluation of the competences of the employees and the effectiveness of the overall system possible.



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