Audit Lakeside Case
October 13, 2015
1. An engagement letter is an essential aspect in establishing an understanding between the client and the audit firm. This documentation is required in order to identify the objective and scope of the audit, outline the specific responsibilities of management and the audit firm, identify inherent limitation of the audit, ascertain the applicable financial reporting framework, and the expected forms Engagement letters are necessary in settling disputes between auditor and management. When management signs the written engagement letter, they are entered into an executor contract with the auditor. In the engagement letter presented by Abernethy and ...view middle of the document...
Purchase orders or invoices from suppliers will be helpful in verifying that the inventory was indeed recorded at the correct cost and will show whether the inventory was actually received or not. As for internal sources, we can verify the amount in cost of goods sold on the income statement by adding the cost of goods sold for each store in the trial balance. Since Lakeside uses a perpetual inventory system that their computer system has set in place, it would also be important to check the functionality of the system. The auditor should also verify a set of sales journal entries to ensure that sales and related cost of goods sold were recorded correctly. The final procedure that will help to verify the amount in cost of goods sold will be to perform a cutoff analysis to ensure that sales are being recorded in the proper period and that cost of goods sold is not inflated.
3. As a consumer electronics company, Lakeside’s inherent risk will be highly associated with inventory. For one, Lakeside’s six stores as well as their warehouse all contain inventory. With consumer electronics, we need to keep in mind that when a newer or improved model is released, the older models often become obsolete. This can seriously impact how inventory is valued. In this industry, a high inventory turnover is necessary to avoid losses on the valuation of inventory. Another inherent risk Lakeside must consider is the theft by customers and employees. With six store locations, the possibility of theft of inventory or cash from the register needs to be considered by the auditor.
4. Throughout an audit engagement, the audit team in constantly monitoring the different types of risk. In order to prepare to monitor this risk, the team identifies critical areas that are subject to material error or misstatement. These critical areas are used in determining the audit procedures because the procedures will vary based on what the firm identifies as a critical area. Once all of the audit procedures have been performed and the audit team is confident that they can release an opinion, whether it is unqualified or qualified, that is when enough evidence has been accumulated. As we learned in class, you can never have too much audit evidence. The problem is it can be costly to acquire all the evidence needed to render an opinion. When an auditor feels that they have a reasonable understanding of the financial records, internal controls, and risks of the business, enough evidence has been collected.
5. Analytical procedures are a prominent tool in identifying critical audit areas. Analytical procedures are performed before planning the audit as well as in the final stages. While the procedures do not prove that the financial information is correct, they are used in comparison to industry data, similar prior period data, client determined expected results, expected results using nonfinancial information, and auditor determined expected results. By doing so, the...