ACCT 4400 Individual Assignment: Audit Planning

QUESTION

ACCT 4400Individual Assignment: Audit PlanningAssignment Background: Capstone Core Objective AssessmentThis assignment involves planning the audit for a hypothetical audit client, and serves as acapstone assessment. By completing this assignment, you will demonstrate each of the followingcore objectives:Critical Thinking Skills (CT) – to include creative thinking, innovation, inquiry, andanalysis, evaluation and synthesis of informationCommunication Skills (CS) – to include effective development, interpretation andexpression of ideas through written, oral and visual communicationEmpirical and Quantitative Skills (EQS) – to include the manipulation and analysis ofnumerical data or observable facts resulting in informed conclusionsSocial Responsibility (SR) – to include intercultural competence, knowledge of civicresponsibility, and the ability to engage effectively in regional, national, and globalcommunitiesThe information and questions needed to complete this assignment begin on page 2.12015 Audit of Gamma Industries: Summary of InformationAssume you are an audit manager, today is April 15, 2015, and your public accounting firm iscurrently planning the 2015 financial statement audit of Gamma Industries, a public companyusing a 12/31 year-end (for this assignment, focus only on the financial statement audit). Gammais a new client for your firm. Gamma manufactures medical equipment, and sells these machinesto hospitals, out-patient surgery centers, and medical offices. The audit partner has asked you tohelp plan the audit for this new client using the following information obtained and summarizedby the engagement team:Ross Parker has been Gamma’s CEO for five years, and previously served as anexecutive vice president at Gamma for seven years. Before joining Gamma, Mr. Parkerworked as an account manager at an advertising agency. A routine background checkrevealed one legal issue for Mr. Parker: he was arrested in 1998 for driving whileintoxicated, but the case was dismissed on a technicality.Emily Fielder, CPA, is Gamma’s CFO and a former auditor. Mrs. Fielder has worked atGamma 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 CFOpositions, respectively, Gamma has experienced significant turnover among itsaccounting personnel. The majority of the current accounting staff do not haveaccounting degrees, although both the controller and chief accounting officer havemaster’s degrees in accounting.Gamma received a qualified financial statement opinion for its 2014 financial statementsfrom the predecessor audit firm. Mr. Parker explained that this opinion was due todisagreements over a subjective accounting estimate, the allowance for doubtfulaccounts. Communications with the predecessor audit firm, which are required bystandards, were consistent with his explanation. These disagreements led the predecessoraudit firm to resign after completing the 2014 audit.The company’s executives receive a base salary and incentive-based compensation suchas stock options and bonuses. For accounting and financial services personnel, Gammaimplemented a policy last year that combines years of service and corporate performanceto encourage stability and limit turnover. Due to this policy, Mrs. Fielder will receive avery large bonus if the company meets its 2015 Basic EPS forecast because she will passtwenty years of service late in 2015.This morning, the audit senior for the Gamma audit, Eric Wall, disclosed to you that his auntowns a material (to her) amount of Gamma’s common stock. Eric told you he does not believehis independence is impaired and wishes to stay on the Gamma audit.Please see the accompanying Excel file for Gamma’s 2014 financial statements.2Questions to Submit to the ProfessorThese questions address issues related to audit planning such as analytical procedures, inherentrisk 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.QuestionsPart 1: Analytical Procedures using the 2014 Financial Statements1. An auditor calculating Gamma’s quick ratio should exclude which of the followingitem(s) from current assets?a. Cash and equivalentsb. Inventoryc. Prepaid Expensesd. B & C only2. The numerator of Gamma’s receivables turnover is equal toa. Eighty percent of Gamma’s net salesb. Gamma’s cost of salesc. Gamma’s net sales3. An auditor calculating Gamma’s gross profit percentage should calculate gross profit as apercentage ofa. Eighty percent of Gamma’s net salesb. Gamma’s cost of salesc. Gamma’s net sales4. An auditor calculating Gamma’s times interest earned ratio should include whichfinancial statement item in both the numerator and denominator?a. Interest expenseb. Net incomec. Notes payable5. Assuming a 360 day year, Gamma’s days outstanding in accounts receivables is __ days.a. 66.94b. 67.87c. 73.896. Gamma’s net profit margin is __ %.a. 3.49b. 5.68c. 8.4537. Gamma’s return on equity (ROE) is __ %.a. 0.81b. 3.02c. 4.578. Gamma’s quick ratio isa. 0.30b. 2.72c. 4.629. Assume Gamma’s usual credit terms are 2/10, net 30. Gamma’s days outstanding inaccounts receivables suggests bad debts are likely __ to accounts receivable.a. Immaterialb. Materialc. Neither A nor B: Bad debts have no relationship with accounts receivable10. Gamma’s profit margin, relative to the industry of average of 17.43%, suggests a __ levelof detection risk.a. Lowb. Highc. Neither A nor B: profit margin is irrelevant to assessing detection risk11. Gamma’s ROA, relative to the industry average of 13.3%, suggests a __ level of inherentrisk.a. Lowb. Highc. Neither A nor B: ROA is irrelevant to assessing inherent risk12. Gamma’s current ratio may be distorted because the companya. Has not fully depreciated and amortized all of its fixed assetsb. Did not present diluted EPS in its financial statementsc. Likely has a high level of bad debtsPart 2: Inherent Risk (IR) Assessment13. List four issues from the summary information on p. 2 that could impact IR at Gamma414. Consider Gamma’s accounting and financial services personnel, including the controller,chief accounting officer, and CFO. What is your assessment of the collective competenceof these employees? How does this assessment impact IR?15. What impact, if any, does the CEO’s (Mr. Parker) driving while intoxicated arrest in 1998impact IR? Explain your answer.16. What is your IR assessment? Support your conclusion using both the summaryinformation in this document and the 2014 financial statements, including the analyticalprocedures you performed in Part 1.Part 3: Audit Engagement Staffing17. Describe your responsibility to the public interest in considering Eric’s issue? How doesthis responsibility impact your consideration of whether to remove him from the Gammaaudit?18. Will you allow Eric to serve on the Gamma audit? Explain your reasoning, including howinvestors and regulators might view his participation on the audit.19. If the average auditor in practice was in Eric’s position and was allowed to stay on theGamma audit, could this person be objective (be sure to explain your answer)? Whatspecific advice would you give this person on how to maintain her/his objectivity?

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