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13 May 2018

When evaluating the monitoring porting of the client's internalcontrol system, what two questions does theauditor need to have answered?

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Nestor Rutherford
Nestor RutherfordLv2
16 May 2018

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You are a newly qualified accountant who works for the auditfirm Harrison Ford & Co. You have been approached by apotential new client, Calista Electronics Pty Ltd, who is lookingfor an audit firm to carry out an audit on its annual financialreport prepared in accordance with the Corporations Act. Themanaging director, Calista Flockhart, is not sure exactly what anaudit involves and what are the responsibilities of theauditor.

Required: Prepare notes for a meeting with Calista Flockhartwhich identifies the responsibilities of the auditor and theresponsibilities of management.

The notes should cover the following:

 Distribution of the annual report to shareholders.

 Delivery of the audit report to the entity.

 Obtaining and evaluating evidence concerning the financialreport.

 Preparation and presentation of the financial report.

 Maintaining adequate internal controls.

 Testing internal control procedures.

 Expressing an opinion on the financial report.

 Selecting appropriate accounting policies.

 Ensuring the financial report is presented in accordance withstandards.

 Performing test of controls.

Specialized Construction Equipment, Inc. is an audit client. Thecompany booked a one-hundred-million-dollar credit sale close tothe end of the fiscal year. The sale is material to annual sales,year-end accounts receivable, and annual profits. This particularsale / receivable is being disputed by the customer. The customer'sversion of events, which you have been able to verify, is that thecustomer came to the audit client's place of business to try to buya hundred million dollars' worth of specialized constructionequipment, but the client's salesperson was a sarcastic little twitwho would not answer any of the customer's questions about thespecifications of the equipment. Finally, the customer asked, "CanI get some consideration here?" The client's salesperson answeredthat, no, the customer would not receive any consideration, notbefore, not during, and not after the sale. Then the salespersoncalled over a menacing-looking 275-pound person who told thecustomer to "put your John Hancock" on the order form. The customersaid, "In that case, you can bill it to John Hancock and send it toJohn Hancock." The customer then crossed out the contents of boththe "bill to" and "ship to" blocks and hand-printed "John Hancock"in both. He then signed "John Hancock" at the bottom of the form,rather than his own name or his company's name. The client's lawyerhas represented to your audit firm that there is not any questionthat the customer signed the order; in fact, the customer admitsthat he wrote "John Hancock" in the space designated for asignature. However, later that same day, the customer placed anorder with a different company, and that different company hasalready delivered the equipment.

Required:

a. In general, excluding the situation regarding this particularsale, what internal controls over sales and collections should theclient have in order to be sufficient for you to rely upon in yourperformance of the total audit?

b. In general, excluding the situation regarding this particularsale, what audit steps should you perform to test whether thecontrols over sales and collections do exist and are working?

c. In general, excluding the situation regarding this particularsale, what audit steps should you perform to test whether thebalances of the sales, accounts receivable, bad debts expense, andallowance for bad debts accounts are fairly presented?

Thanks

Refer to the Columbia Sportswear Annual Report in Appendix A.You will need to find and then read the following reports:

• Management’s Report on the Consolidated Financial Statements(Item 8)
• Report of Independent Registered Public Accounting Firm onConsolidated Financial Statements (Item 8)
• Management’s Report on Internal Control Over Financial Reporting(Item 9A)
• Report of Independent Registered Public Accounting Firm onInternal Control over Financial Reporting (Item 9A)

Requirements

1. Who is responsible for the information in the annual report? Whois responsible for recommending the independent accountants to theboard of directors?
2. Who were the independent auditors? Under what standards did theyconduct their audit? What was their opinion of the auditedfinancial statements?
3. Who is responsible for establishing and maintaining adequateinternal control over financial reporting? Is the effectiveness ofthe internal controls ever reviewed? Do you think that internalcontrol procedures are necessary? Why?
4. Do the auditors have any responsibility with respect to theinternal controls? What was the auditor’s opinion regarding themanagement assessment of internal con- trol effectiveness?

NOTE: Go beyond the textbook and search for articles on TheSarbanes Oxley (Section 404). Include what you’ve learned from yourresearch in your response to the above questions.

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