代做ACCT 611 Seminar in Auditing and Assurance Services Final Exam调试R语言程序
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Final Exam, Version 1
Questions ONLY
I. A comprehensive audit case (adapted CICA question, INDIVIDUAL Report only)
You are a partner at London and Paris LLP, a renowned CPA firm in the Midwestern United States. As part of the firm's quality control program, you are tasked with conducting an independent review of completed audits.
Currently, you are examining the audit working papers and a draft of the financial statements for Wallis Electronics Inc. for the fiscal year ending September 30, 2023. These documents include the suggested auditor's report—an unqualified opinion—prepared by the engagement partner. Wallis Electronics designs and manufactures components for various consumer electronics, such as radios and televisions. The company, a family-owned business since its founding by Frank Wallis, who passed away several years ago, primarily supplies large consumer electronics manufacturers. Notably, a major portion of its sales—approximately 40%—is to a leading South Korean conglomerate.
Wallis Electronics has been a client of your firm for three years. The audit, which lasted about five weeks, was conducted by a team comprising two senior auditors—Tony, the Senior Accountant I and team leader, and Leslie, the Senior Accountant II—along with three junior auditors, Mary, Jack, and Tom. The engagement partner had already reviewed the working papers prior to your evaluation. The financial statements indicate that at year-end, the company had total assets of $250,000,000, revenues of $300,000,000, and pre-tax income of $10,000,000.
During your review of the working papers, various memoranda, and review notes prepared by the staff and engagement partner, you identified several issues that arose during the audit and the approaches taken by the audit team to resolve them.
Issue #1. Inventory Audit
While testing the client's finished goods inventory, Mary noted a significant quantity of older, dust-covered parts. The perpetual inventory records revealed these parts, manufactured two years earlier for a South Korean client—a major business partner—had been left unshipped following the cancellation of the order. The recorded inventory value of these components stood at approximately $1,500,000. When Mary inquired about these parts, the production manager indicated that the company had chosen to retain the inventory, hoping to eventually find another buyer.
Upon reviewing Mary's findings, Senior Auditor Tony concluded that no adjustments were necessary, deeming the amount to be immaterial. This assessment was later affirmed by the engagement partner, who added their concurrence with a note: "I agree."
Issue #2. Cutoff Test
Wallis uses “FOB Shipping Point” as the standard trade term when selling its components to domestic and international customers. Since its products are all standardized industry components, contractual obligations under contracts usually end after Wallis ships out its products.
Leslie, the SA II, conducted FY 2023 revenue cut off test for Wallis Inc. Below is an excerpt from her working papers. She pointed out that Wallis made a small error: Accounting for consignment transaction as a real sale. She proposed to reverse the $80,000 revenue and $46,000 COGs (Transaction #4 below. Her proposed adjustments have been accepted by the client) and concluded her cutoff audit. The engagement partner approved her working paper on the cutoff test with two words, “well done”. A snapshot of the working paper is provided below,
Sales Sales Cost of Shipping
Invoice Invoice Goods Document
Amount Date Sold Date
Sep
1) $42,000 9/28 $38,000 9/29
2) 18,000 9/29 14,000 9/22
3) 20,000 9/30 12,000 10/2
4) 80,000 9/30 46,000 9/30(shipped to consignee)
Oct
1) $30,000 10/1 $22,000 10/1
2) 20,000 10/2 13,000 10/1
3) 40,000 10/3 29,000 9/30
Issue #3. A/R and A/P Audit
Tony (SA-I) and Jack (junior) were tasked by their audit manager to conduct an audit of the accounts receivable (A/R) and accounts payable (A/P) accounts. During the first two days of the audit, Jack, under Tony’s supervision, efficiently completed the A/R audit work, and then moved on to the A/P audit. To Tony’s delight, Jack completed all the A/P audit work in just 6 hours and then sat idle for further instructions.
Jack explained to Tony how he performed the A/P audit. First, he classified the A/P accounts into three categories: A, B, and C.
Category A accounts were those with balances over $50,000, and Jack's confirmation procedures covered 100% of those accounts. He obtained the A/P balance for each account from the A/P sub-ledgers and then requested confirmation from the vendor of the audit client.
Category B accounts were those accounts with balances between $3,000 and $50,000, and Jack's confirmation procedures covered 20% of those accounts.
For the remaining A/P accounts with balances under $3,000, they all belonged to Category C, and Jack only took a 5% sample (in terms of the number of sub-ledger accounts) and sent confirmations.
As a star graduate of Catalina State University, Short Colina (CSUSC), Jack proudly reminded Tony that he still remembered the concept of materiality from Prof. Zheng's class. Jack's approach effectively covered 94% of the total dollar value of A/P accounts, impressing Tony again, who is also a CSUSC alumnus.
Tony was pleased to have such an excellent colleague.
Required
After careful consideration of all the facts above, you decide to compose a memorandum addressed to the engagement partner. A copy of the memo will also be forwarded to the managing partner of the CPA firm to communicate your opinions regarding this audit engagement. In the memo, you will detail your stance on the issues at hand and what must be done before you are comfortable giving your approval to the engagement. To accomplish this, you will conduct a thorough evaluation of the three audit issues presented, giving credits to some excellent audit team members, and highlighting any flaws or errors. Please do not forget to provide your professional recommendations.
II. Deluxe Chicken Inc. (INDIVIDUAL Report only, 70 points)
Founded in 1989 by Sebastian Bony, Deluxe Chicken (DC) specializes in rotisserie-cooked chicken accompanied by fresh vegetables and other side dishes. DC operates its own stores and franchises in a manner similar to Kentucky Fried Chicken (KFC). Sebastian describes DC’s mission as providing "a home meal replacement" across the New England and Mid-Atlantic regions.
DC went through an impressive expansion. At the end of 1991, the firm operated only 34 stores, with no franchisee stores. But by the end of 1994, the total of stores (company-owned stores and franchise stores) had increased to 534 (491 were franchise stores). It was estimated that DC’s franchise store can easily break even if its weekly average revenue per store exceeds $23,000. According to Reuters, its stock price had risen steadily from $8 in November 1993 to $23 in March 1997.
DC’s auditor is a prestigious Big-8 accounting firm, Firehouse Young LLP. The 1994 and 1995 fiscal year financial statements below were all audited numbers, but the 1996 numbers were unaudited.
DC’s excellent performance also impressed Wall Street. Stock analyst Mike Foster of Silverman Sterling forecasted that DC’s EPS would grow at an annual rate of around 35% between 1997 and 2001 and gave a “strong buy” rating. It was rumored that the wealth management division of Mohan Stoney took a passive 3% stake in this firm. Many hedge funds followed the rumor and added DC’s shares to their portfolios.
Table 1. CONSOLIDATED INCOME STATEMENTS
Fiscal Years Ended
------------------------------------------------
December 25, December 31, December 29,
1994 1995 1996
(in thousands) (in thousands) (in thousands)
Revenue:
Royalties and franchise related fees........... $43,603 $ 74,662 $115,510
Company stores sales........................ .. 40,916 51,566 83,950
Interest income................................ 11,632 33,251 65,048
Total revenue............................... 96,151 159,479 264,508
Costs and Expenses:
Cost of products sold.......................... 15,876 19,737 31,160
Salaries and benefits.......................... 22,637 31,137 42,172
General and administrative..................... 27,930 41,367 99,847
Relocation expense ....................... 5,097 - -
Total costs and expenses.................... 71,540 92,241 173,179
Income From Operations.......................... 24,611 67,238 91,329
Other Income (Expense):
Interest expense, net......................... (4,235) (13,179) (14,446)
Gain on issuances of subsidiary's stock........ - - 38,163
Other income, net.............................. 74 314 137
Total other income (expense)................ (4,161) (12,865) 23,854
Income Before Income Taxes
and Minority Interest......................... 20,450 54,373 115,183
Income Taxes..................................... 4,277 20,814 42,990
Minority Interest in (Earnings)
of Subsidiary................................ - - (5,235)
Net Income...................................... $16,173 $ 33,559 $ 66,958
======= ======== ========
TABLE 1. CONSOLIDATED INCOME STATEMENTS (to continue)
Fiscal Years Ended
------------------------------------------------
December 25, December 31, December 29,
1994 1995 1996
(in thousands) (in thousands) (in thousands)
Net Income Per Common and
Equivalent Share...... $ 0.38 $ 0.66 $ 1.01
====== ======== ========
Shares outstanding at year end
(in thousands)........ 44,700 59,129 64,246
====== ======== ========
TABLE 2. CONSOLIDATED BALANCE SHEETS
December 31, December 29,
1995 1996
(in thousands) (in thousands)
Current Assets:
Cash and cash equivalents...................................... $ 310,436 $ 100,800
Accounts receivable, net....................................... 13,445 22,438
Due from area developers, royalty and interest ................ 9,614 10,246
Notes receivable from area developers, due in 12 months......... 5,462 -
Prepayment and other current assets..................... 4,858 12,979
Total current assets....................................... 343,815 146,462
Property and Equipment, net..................................... 258,550 334,748
Long-term Notes Receivable from area developers................. 450,572 800,519
Goodwill, net................................................... - 190,439
Other Assets, net............................................... 20,940 71,448
Total assets............................................... $1,073,877 $1,543,616
Current Liabilities:
Accounts payable.............................................. $ 12,292 $ 40,430
Accrued expenses.............................................. 9,095 36,547
Deferred franchise revenue.................................... 8,945 10,656
Total current liabilities................................... 30,332 87,633
Deferred Franchise Revenue...................................... 2,072 7,740
Convertible Subordinated Debt................................... 129,872 129,841
Zero coupon bond ....................................... 177,306 182,613
Deferred Income Taxes........................................... 16,631 40,216
Other Noncurrent Liabilities.................................... 833 6,292
Minority Interest............................................... - 153,441
Stockholders' Equity:
Common stock............................................... 591 642
Additional paid-in capital.................................. 675,611 827,611
Retained earnings........................................... 40,629 107,587
716,831 935,840
Total liabilities and stockholders' equity............ $1,073,877 $1,543,616
Shares outstanding at year end(in thousands)........ 59,129 64,246
TABLE 3. CONSOLIDATED CASH FLOW STATEMENTS
December 25, 1994 December 31, 1995 December 29, 1996
(In thousands) (In thousands) (In thousands)
Cash Flows from Operating Activities:
Net income................................ $ 16,173 $ 33,559 $ 66,958
Adjustments:
Depreciation and amortization........... 6,074 11,442 22,887
Interest expense on zero coupon bond... - 8,075 13,793
Gain on issuances of subsidiary's stock - - (38,163)
Deferred income taxes................... 4,277 12,133 14,059
Minority interest....................... - - 5,235
Provision for write-down of assets...... - - 14,550
Loss (gain) on disposal of assets....... (368) 231 68
Changes in assets and liabilities
A/R & due from area developers (7,800) (10,057) (7,193)
Accounts payable and accrued expenses.... 13,724 3,661 48,674
Deferred franchise revenue............. 5,926 (303) 3,174
Other assets and liabilities......... . (2,088) (3,265) 868
Net cash provided by operating activities 35,918 55,476 144,910
Cash Flows from Investing Activities:
Purchase of PPE and other assets ...... (168,797) (149,231) (137,432)
Proceeds from the sale of PPE assets. 62,342 80,910 86,320
Loans (notes receivable) to area developers (225,282) (661,033) (1,467,065)
Repayment of notes receivable by area developers 68,498 407,499 993,151
Net cash used in investing activities.. (263,239) (321,855) (525,026)
Cash Flows from Financing Activities:
Proceeds from issuance of common stock 125,703 385,360 112,863
Proceeds from issuance of subsidiary's stock - - 135,422
Proceeds from issuance of convertible bond 130,000 - -
Proceeds from issuance of zero coupon bond - 172,464 -
Increase in deferred financing cost....... (7,615) (6,313) (3,799)
Proceeds from revolving bank credit line.... 96,130 229,240 43,250
Repayments of revolving bank credit lin...... (96,130) (229,240) (117,256)
Net cash provided by financing activiti.. 248,088 551,511 170,480
Net Increase (Decrease). 20,767 285,132 (209,636)
in Cash and Cash Equivalents
Below is some info from footnotes for your reference:
1. Principles of Consolidation. The consolidated financial statements include the accounts of the Company and its subsidiaries.
2. Revenue Recognition. Revenue from Company stores is recognized when food is sold. Royalties are recognized when related franchise store revenue is generated. It is 5% of the franchise revenue. Initial franchise fees and area development fees are recognized as DC’s revenue when the franchised store opens. Franchise store also pays 5.75% of its revenue for system-wide marketing use.
3. Franchise store performance is not included in the consolidated financial statements since DC has no equity investment larger than 50% in any franchise store.
4. Area developers are large regional franchises which focus on major U.S. metropolitan markets. The initial investment consists of 25% equity (contributed by independent business owners) and 75% loan made from Deluxe Chickens. Area developers have no other sources for investment. DC believes that it is difficult for small franchises to get bank loans, therefore, DC always loans the money to support those area developers. DC loans are recorded at historical cost. The average interest rate is around 8.2% in 1996.
Below are some disclosed info about all area developers 1995 1996
Total number of area developers 15 14
Total number of stores open by those developers 627 841
Gross Revenue (in thousands) $491,341 $865,082
Total gross assets aggregated for those developers (in thousands) $513,926 $640,534
Debt to Deluxe Chicken Inc. (in thousands) $372,071 $555,105
Total stockholder’s equity (or deficit) (in thousands) (9,891) (102,754)
TABLE 4. Net Income vs. OCF
Fiscal Years Ended
------------------------------------------------
December 25, December 31, December 29,
1994 1995 1996
(in thousands) (in thousands) (in thousands)
Net Income...................................... $16,173 $ 33,559 $ 66,958
Net cash provided by operating activities 35,918 55,476 144,910
As a senior auditor at Firehouse Young LLP, you are tasked with auditing Deluxe Chicken's (DC) financial statements for 1996. John is the manager in charge and Kelvin Collins, a straight-A graduate from CSU Short Colina, is your junior. Below is some conversation between you (Y) and Kelvin (K).
You (Y): DC is not a difficult account, but audit fee is never fat. So watch out when filling time sheets. BTW, have you ever tried AP (analytical procedures) by now?
Kelvin (K): Got it, AP is not done yet. But I had a quick scan of the numbers and compared net income and OCF in the last 3 years. I learned this trick from Professor Zheng’s class. Net income looks healthy as it is well-supported by operating cash flow. Look at the numbers below, NI/OCF ratios vary between 0.45 and 0.60. No negative OCF and no “kiss of death” in 1995 and 1996. It should not be a tough audit this year.
Required:
Turn your clock back to February 1997. As a senior auditor, you are expected to perform. analytical procedures and then write a memo to your manager. In your memo, you must highlight those accounts that might be subject to material misstatements and support your conclusions with solid evidence, calculation, GAAP knowledge, and your professional judgment.