The Audit Report and Internal Control Evaluation Essay
The Audit Report and Internal Control Evaluation
Team D Auditing has been evaluating the evidence presented by Apollo Shoes. The audit team has developed an audit report in response to the audit and has also provided a description of the evidence, a description of the account sampling and testing procedures used, and has also given a brief description of the value of an audit report. This report is only to reflect Team D’s opinion regarding Apollo’s internal controls, financial statements, and management’s assessment.
We have audited the financial statements of Apollo Shoes Inc., including the balance sheet, income statement, and statement of cash flows. The company’s management is responsible for preparing these financial statements; in addition, the management is responsible for implementing adequate internal controls to ensure the accuracy and completeness of these statements (Arens, Elder, & Beasley, 2012). Our responsibility as an auditor is to conduct an audit in accordance with the Generally Accepted Auditing Standards and express an opinion on these statements based on the audit.
The audit conducted by Team D Auditing was executed in accordance with standards set by Generally Accepted Accounting Principles (GAAP) and the Public Company Accounting Oversight Board (PCAOB) (Arens et al., 2012). The standards set by these two bodies require the team to arrange and complete an inspection of the evidence to obtain reasonable assurance of whether the company’s financial statements are without material misstatements. Also, the team is to evaluate the internal controls and determine if they provide adequate control over the financial reporting for the material components.
The audit includes the examination of the following:
Financial Statement Disclosures
Evidence that supports reported amounts
Internal Controls: Implementation and Current Use
Financial Statement Presentation
Accounting Principle Assessments
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Apollo Shoes, Inc.
Apollo Shoes Audit was conducted under the Public Accounting Oversight Board Standards. Under these standards is required to provide assurance about the financial reporting and the internal control place in operation. In order to achieve assurance the financial statements are evaluated based on an examination of evidence providing basis for our opinion.
Our examination included:
Significant estimates made by management – evaluate the reasonable of the significant assumptions (Becker CPA Review, 2014). Financial statement presentation – evaluate the presentation and format of financial information (Arens et al., 2012). Accounting principle evaluation, corrections of errors involving principle or changing principal not acceptable to an acceptable one” (Arens et al., 2012).
Adequate disclosures of significant accounting policies, accounting changes or loss contingency (Becker CPA Review, 2014). Since Apollo Shoes was a public traded company is imperative to test the effectiveness of the internal control, which is based on: Preventive controls that are placed in operation indicating that transactions were valid, recognized, and submitted for processing following the internal control objectives (Becker CPA Review, 2014). Detective controls provide assurance that the errors and regularities are discovered and corrected in the normal course of business (Becker CPA Review, 2014).
Our evidence examination should provide assurance that the financial statements are correct in order for us to sustain our opinion. However, it is impossible due to inherent limitations that the internal controls may not prevent or detect material misstatements. As discussed in note 5, based on our finding the sales and account receivables were overstated by $5,765,081.82 and the related cost of goods sold by $3,165, 145.10 (Louwers, 2007). We determined that this sale is not in accordance with general accepted accounting procedures.
Based on the evidence and procedures performed as mentioned in the previous paragraph, Team D opinion on Apollo Shoes financial statement for the period ending on December 31, 2007 do not present fairly on all material respect the financial position of the company. However, we are confirming the efficiency and effectiveness of the internal control, based on COSO framework.
It is important to mention that Apollo Shoes has a litigation suit in the preliminary stage for $12,000,000, which intend to defend them self. It is reasonable that the loss could reach $10,000,000 after legal fees (Louwers, 2007). No adjustments have been made to the financial statements. Since Apollo has lost his major customer, this has raised a substantial doubt about the ability that Apollo Shoes Inc. can continue as a going concern. The financial statements do not include any adjustment that contemplates this uncertainty.
Description of Evidence
The evidence used for the audit included several items presented by Apollo Shoes. The team was presented with the SEC 10-K filing from 2006, as well as the minutes from the audit committee meeting. The team also reviewed the company Letter to the Shareholders. The SEC filing provided us with historical financial statements and a wealth of other information about the company, including quarterly unaudited operation results. The team also reviewed the company accounting and control procedures manual to evaluate the controls over the accounting functions of the company, such as accounts receivables and cash management.
Team D Auditing also performed an inventory observation, reviewed the sales forecast for the upcoming year, and reviewed the Board Meeting minutes from the meeting June 30, 2007. The team was also able to examine the 2006 audited and the 2007 unaudited trial balances, the work papers for the new computer system and the work papers for the internal control systems. The team was able to perform a thorough audit for Apollo Shoes based upon the evidence presented.
The goal of an audit is to ensure the financial statements are fairly presented in accordance to the Generally Accepted Auditing Standards, and to obtain reasonable assurance that the statements are free from material errors. It is impossible and costly to test every transaction; therefore, we will be selecting samples for testing and make inference about the overall effectiveness of these statements. We will use the simple random sampling method to select these samples because this method ensures every item has an equal chance of being included (Arens et al., 2012). In addition, depend on the account we are testing different number of items may be included in each sample.
The auditor used industry data and compared it to Apollo Shoes financial information to comprehend the business and its results to determine if the company financial well-being. The auditor also compared the “client data with similar prior period data” (Arens et al., 2012, p. 227). This included the following: Comparing the current year with the previous year’s audited balance Examine current and previous year’s trial balance to decipher changes. Compared detail of total balances with previous year’s total balance “Compare details such as monthly totals of current year and preceding year for sales, repairs, loans payable, and other accounts” noticing significant changes (Arens et al., 2012, p. 227).
Compared current ratios and percentages of current and previous years Compare current and previous common-size financial statements with vertical and horizontal analysis; Compare ratios analysis “solvency, efficiency, and profitability ratios” (Boynton, 2006, p. 325). Compared client prepared information with auditor’s expectations Auditor develops an estimation or expectation of results and account balances and compares it to client’s expectations, results, and account balances examining difference. Examine lead schedules prepared by the client.
Audit Report Value
The value of an audit report is quite simple. It is the written representation of the auditor’s opinion and acts of an almost guarantee for company investors, creditors, and clients. The audit report lists the auditor and director responsibility, gives the scope of the audit, and reports the auditor’s opinion. It lets the users of the financial statements know that they can be reasonably assured statements are without material misstatement and can use the contained information to make their decisions. Of course, the opinion given is not completely guaranteed.
Team D Auditing carefully considered the given evidence and performed tests of the internal controls and has come to the conclusion that we are unable to provide reasonable assurance that the financial statements are without material misstatement. We are also concerned with the future of Apollo Shoes with the loss of its biggest client and the pending lawsuit. The audit report, including some additional information regarding the evidence, sampling, and testing procedures have been submitted for review.
Arens, A. A., Elder, R. J., & Beasley, M. S. (2012). Auditing and assurance services: An integrated approach (14th ed.). New York, NY: Pearson/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.