Beginning The Audit Report Essay
Beginning The Audit Report
Thank you for choosing Team D Auditing for your audit needs. This letter is to inform you on how we plan to begin the audit process for your company. We will be performing an audit on the financial statements for Apollo Shoes for the year ended December 31, 2007 in order to provide reasonable assurance that the statements are presented fairly and are presented in accordance with Generally Accepted Accounting Principles (GAAP) (Arens, Elder, & Beasley, 2012). We will begin the audit by reviewing the statements as well as your organizational charts and the prior five years of federal income tax returns. After careful review of all documentation, we will review risks so that we can identify any potential risks and can draft the audit plan (Arens et al., 2012). We will then ask to meet with management to determine the scope of the audit and answer any questions that management may have.
After the meeting, we will finalize the audit plan and begin our fieldwork. Our field time will be spent speaking with staff members and management, reviewing documentation such as policy and procedure manuals, learning about the business, and performing tests. We will be testing internal controls, ensuring the business is in compliance with applicable financial regulations, and testing the materiality of the financial statements (Arens et al., 2012). We will be holding scheduled meetings with staff and management and hope that we will have full cooperation.
We will try to interrupt the business as little as possible. Our fee schedule will be based upon the total time spent on each stage of the audit and we will be submitting invoices along the way. Our preliminary estimation of cost is $200,000 and we will notify you immediately of any changes that could exceed that estimation. Our formal engagement letter, preliminary engagement checklist, and preliminary time frame estimate with audit milestones are included in the appendices for your review.
American Institute of Certified Public Accountants. (2014). General Audit Engagement Checklist. Retrieved from http://www.aicpa.org/interestareas/peerreview/resources/peerreviewprogrammanual/2013/downloadabledocuments/20400-gen-audit-check-interimguidance.pdf Arens, A. A., Elder, R. J., & Beasley, M. S. (2012). Auditing and assurance services: An integrated approach (14th ed.). New York, NY: Perason/Prentice Hall. Becker Professional Education/CPA Review (2014) Audit Reports; Devry/Becker Educational Development Corp. Boynton, W. C. (2006). Modern Auditing (8th ed.). Danvers, MA: John Wiley & Sons, Inc. Louwers, T. R. (2007). Apollo Shoes, InC. Auditing and Assurance Services. McGraw-Hill Companies, Inc. Public Company Accounting Oversight Board. (2014). Auditing Standard No. 16. Retrieved from http://pcaobus.org/Standards/Auditing/Pages/Auditing_Standard_16_Appendix_C.aspx Raspante, J. F. & Vono, S. (2014). Engagement letters for the individual tax practitioner. Journal of Accountancy, retrieved from: http://www.journalofaccountancy.com/Issues/2014/Jan/20137591.htm
This letter is to confirm the agreement and to discuss the objectives for the audit of Apollo Shoes, Inc. financial statements for the year ending December 31, 2007. We will be auditing the balance sheet, income statement, statement of retained earnings and cash flow. The financial statements and the effectiveness of the internal control is responsibility of management (Becker CPA Review, 2014). I want to clarify that we have to have an understanding of the company and the internal control in order to provide an opinion. Although an audit should provide reasonable assurance about that the financial statement are free of material misstatement we cannot provide absolutely assurance due to inherent limitation in the internal control (Becker CPA Review, 2014).
We request that the company can provide us with adequate evidence necessary to perform the audit. It is critical that we have access to information and files including the minutes, besides to be able to inquire personnel and the observation of procedures as necessary. We have the responsibility that if a material weakness and or a significant deficiency are discovered in the performance of the audit, it should be communicated to the audit committee in writing (PCAOB, 2014). The management is also responsible to adjust the financial statements to correct material misstatements found during the audit; if the correction are not done because they are immaterial, it should be stated as part of the representation letter were management is confirming their responsibilities during the audit (PCAOB, 2014).
Our out of pocket expenses and fees are estimating in $200,000, which covers the hours spent during the audit. If anything may affect this estimate we will let you know. Our fees are due when we complete the audit (Raspante & Vono, 2014). We are very enthusiastic to be your new auditors and we hope to fulfill your expectations. If you agree with this agreement, please sign in the space provided; keep a copy for your records and return us the original signed. If you have any further questions, please do not hesitate to contact me.
October 29, 2007: Received accounting procedures manual from Karina Ramirez for fieldwork (Louwers, 2007, p. 32). January 7, 2007: Prepare working papers for Board Minutes of important events and transactions during the past year. Make notes in the audit working papers of matters relevant for the auditor for the 2007 financial statements. Use the reference ‘GA-3’ with the following headings and information in a table format: Information Relevant to 2007 and Audit Auction Recommended (Louwers, 2007, p. 36). January 3, 2008: selection by audit committee of Anderson, Olds, & Watershed as auditors ratified (Louwers, 2007, p. 39). January 3, 2008: $750,000 fee was approved for the 2007 audit (p. 36); January 8, 2008: Received Apollo’s 2007 year-end trial balance, along with 2006 audited trial balance (p. 40). January 8, 2008: Create 3 spreadsheets for a 2 year comparative balance sheet, income statements, and statement of cash flows (p. 40). January 9, 2008: Perform preliminary analytical procedures on the financial statements.
This includes calculating common-size financial statements and dollar amount, and percent changes—use recent spreadsheet created for comparative statements; calculate financial ratios with common stock at $24 million in current and prior periods; Compare Apollo’s numbers with closest competitors, such as Nike and Rebook at EDGAR for industry averages; write a brief memo highlighting potential problem areas with calculations (p. 43). January 9, 2008: Write a brief memo (GA-4) highlighting what you believe are potential problem areas. Include calculations to support (GA-4-1, GA-4-2, etc. (p. 43). January 9, 2008: Prepair a memo (GA-5) addressing materiality for Apollo Shoes. The workpaper documents must be following GAAP. Address the following: 1. Briefly describe indepdendent auditors concept of materiality; 2. Describe some commone relationships and other considerations used by auditors when assessing the dollar amount considered matieral.
What are some common measures of materiality with respect to income, sales, and toal assets? 3. Based on professional judgement, determine an amount you consider to be a minimum material misstatement for Apollo Shoes and justify your recommendation in your memo (p. 45). January 10, 2008: Write a memo (GA-6) addressing the potential for fraud for Apollo shoes. This should include SAS 99 fraud guidance addressing the following: 1. Have you noticed any ‘red flags’ in either the minutes or analytical procedures so far? 2. Address fraud risk in general terms: types of risk (improper revenue recognition), significance of risk, likelihood of risk, pervasiveness or risk centralized to one function of or individual or is it throughout the organization?
3. How might fraud be perpetrated or concealed in the entity; 4. Suggest ways we might alter our audit approach to address the potential for fraud, such as assignment of personnel, predictability of auditing procedures, and examination of journal entries and other adjustments; Continued for memo—what we’ll need to get together with the entire audit team for brainstorming session next week. January 10, 2008: AOW was informed of the Apollo’s mid-year computer installation. How will the computer processing, for the last two quarters’ transaction affect our audit this year? How will we use our new laptops for the Apollo engagement? For example, correspondence, memos, auditing working papers, prepared and maintained on the new laptops (p. 46).