ACCOUNTING- The BakFirn Corporation, a publicly traded firm,

QUESTION

ACCT460-1204A-01 Professional Accounting

Assignment Name:

Unit 3 Individual Project

Deliverable Length:

500–1,000 words

Details:

The BakFirn Corporation, a publicly traded firm, has
contracted with YOUCPA, your public accounting firm, for an audit. The
BakFirn Corporation manufactures specialty construction tools. The tools are
used in the unique construction of homes, warehouses, and multiunit
dwellings. The prices range from $1,000 to $5,000 per unit.
During the audit, the audit team has determined the risk
assessment of the client. Consequently, the audit has to respond to the
assessed risks of material misstatement at the financial statement and
assertion levels. The YOUCPA audit team has asked you, the auditor, to
prepare a list of actions that you will take to assess the audit risk.
The following information is available in the year just
finished:

The
BakFirn Corporation end-of-year is 12/31/20XX.
Sales
for the previous year were $10,000,000. Sales this year are coming in at
$9,500,000.
The
firm is in the construction machine industry, making specialty tools.
Account
receivable days sales outstanding (DSO) has been averaging 90–120 days.
The year before, it was 80–90 days.
Inventory
turns have decreased from 3 to 2 per year.
Account
receivable and inventory make up 80% of total assets.
Internal
auditing has been reduced by one person to reduce costs.
An
initial test of controls in cash receipt indicated a lack of following
procedures.
The
construction industry is in the third year of a downturn. It is
forecasted to last two more years.
The
audit team has defined materiality to be focused on account receivable
and inventory with $3,000 being the initial threshold. Net income for
last year was $1,000,000.
Inventory
at the end of the year was $2,500,000.
Account
receivable at the end of the year was $2,740,000, or 100 DSO.
The
previous auditors did not disclose any fraud or any management issues at
the meeting with BakFirn and YOUCPA. The reason for the auditor change
was explained as a costs reduction program.

Assignment Guidelines:

Audit
Assessment Steps:

What
is the initial audit risk? High, medium or low?
What
factors made you decide on this level?

Audit
Plan Assertions

What
would you include in the audit plan, and why?
Would
you plan a test of controls or substantive tests? Why or why not?
Would
these tests make a difference in the nature, timing, and extent of
audit procedures? If so, how?

Audit
Plan Evidence

Would
you plan to put reliance on prior-year evidence? Why, or why not?
Would
your evidence come from observation, analytical procedures, or other
means? Explain your reasoning.
Would
the evidence prove or disprove an assertion on the reliance of a
specific balance sheet account or financial statement account? Explain
your reasoning.

Grading Criteria
34%
17% What is the initial audit risk? High, medium
or low?
17% What factors made you decide on this level?
33%
11% What would you include in the audit plan,
and why?
11% Would you plan a test of controls or
substantive tests? Why, or why not?
11% Would these tests make a difference in the
nature, timing, and extent of audit procedures? If so, how?
33%
11% Would you plan to put reliance on prior-year
evidence? Why, or why not?
11% Would your evidence come from observation,
analytical procedures, or other means? Explain your reasoning.
11% Would the evidence prove or disprove an
assertion on the reliance of a specific balance sheet account or financial
statement account? Explain your reasoning.

Objective:

 Develop a thorough understanding of accounting standards
and principles.
 Fulfill the core accounting educational requirement to
sit for the CPA exam.
 Prepare to practice in public and private accounting
position.

ANSWER:

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