“ACCT 4400
Individual Assignment: Audit Planning

Assignment
Background: Capstone Core Objective Assessment

This assignment involves planning the audit
for a hypothetical audit client, and serves as a capstone assessment. By
completing this assignment, you will demonstrate each of the following core
objectives:

Critical Thinking Skills (CT) – to include creative thinking, innovation, inquiry, and analysis,
evaluation and synthesis of information

Communication Skills (CS) – to include effective development, interpretation and expression of
ideas through written, oral and visual communication

Empirical and Quantitative Skills (EQS) – to include the manipulation and analysis of numerical data or
observable facts resulting in informed conclusions

Social Responsibility (SR) – to include intercultural competence,
knowledge of civic responsibility, and the ability to engage effectively in
regional, national, and global communities

The
information and questions needed to complete this assignment begin on page 2.

2015
Audit of Gamma Industries: Summary of Information

Assume you are an audit manager, today is
April 15, 2015, and your public accounting firm is currently planning the 2015
financial statement audit of Gamma Industries, a public company using a 12/31
year-end (for this assignment, focus only on the financial statement audit). Gamma
is a new client for your firm. Gamma manufactures medical equipment, and sells
these machines to hospitals, out-patient surgery centers, and medical offices.
The audit partner has asked you to help plan the audit for this new client using
the following information obtained and summarized by the engagement team:

Ross
Parker has been Gammas CEO for five years, and previously served as an
executive vice president at Gamma for seven years. Before joining Gamma, Mr.
Parker worked as an account manager at an advertising agency. A routine
background check revealed one legal issue for Mr. Parker: he was arrested in
1998 for driving while intoxicated, but the case was dismissed on a
technicality.
Emily
Fielder, CPA, is Gammas CFO and a former auditor. Mrs. Fielder has worked
at Gamma in various positions for nearly two decades, and has been CFO for
six years.
While Mr.
Parker and Mrs. Fielder have provided consistency in the CEO and CFO
positions, respectively, Gamma has experienced significant turnover among
its accounting personnel. The majority of the current accounting staff do not
have accounting degrees, although both the controller and chief accounting
officer have masters degrees in accounting.
Gamma
received a qualified financial statement opinion for its 2014 financial
statements from the predecessor audit firm. Mr. Parker explained that this
opinion was due to disagreements over a subjective accounting estimate,
the allowance for doubtful accounts. Communications with the predecessor audit
firm, which are required by standards, were consistent with his
explanation. These disagreements led the predecessor audit firm to resign
after completing the 2014 audit.
The
companys executives receive a base salary and incentive-based
compensation such as stock options and bonuses. For accounting and
financial services personnel, Gamma implemented a policy last year that
combines years of service and corporate performance to encourage stability
and limit turnover. Due to this policy, Mrs. Fielder will receive a very
large bonus if the company meets its 2015 Basic EPS forecast because she
will pass twenty years of service late in 2015.

This morning, the audit senior for the
Gamma audit, Eric Wall, disclosed to you that his aunt owns a material (to her)
amount of Gammas common stock. Eric told you he does not believe his
independence is impaired and wishes to stay on the Gamma audit.

Please see the accompanying Excel file for
Gammas 2014 financial statements.

Questions
to Submit to the Professor

These
questions address issues related to audit planning such as analytical
procedures, inherent risk assessment, and audit engagement staffing. Per the
syllabus, you must submit two versions: hard-copy in class on the due date and
an electronic version through Turnitin via Blackboard. You must also record the
multiple choice questions on the scantron provided by your instructor.

Questions

Part
1: Analytical Procedures using the 2014 Financial Statements

An
auditor calculating Gammas quick ratio should exclude which of the
following item(s) from current assets?

Cash and
equivalents
Inventory
Prepaid
Expenses
B & C
only

The
numerator of Gammas receivables turnover is equal to

Eighty
percent of Gammas net sales
Gammas
cost of sales
Gammas
net sales

An
auditor calculating Gammas gross profit percentage should calculate gross
profit as a percentage of

Eighty
percent of Gammas net sales
Gammas
cost of sales
Gammas
net sales

An
auditor calculating Gammas times interest earned ratio should include
which financial statement item in both
the numerator and denominator?

Interest
expense
Net
income
Notes
payable

Assuming
a 360 day year, Gammas days outstanding in accounts receivables is __
days.

66.94
67.87
73.89

Gammas net
profit margin is __ %.

3.49
5.68
8.45

Gammas
return on equity (ROE) is __ %.

0.81
3.02
4.57

Gammas quick
ratio is

0.30
2.72
4.62

Assume
Gammas usual credit terms are 2/10, net 30. Gammas days outstanding in
accounts receivables suggests bad debts are likely __ to accounts
receivable.

Immaterial
Material
Neither
A nor B: Bad debts have no relationship with accounts receivable

Gammas
profit margin, relative to the industry of average of 17.43%, suggests a
__ level of detection risk.

Low
High
Neither
A nor B: profit margin is irrelevant to assessing detection risk

Gammas
ROA, relative to the industry average of 13.3%, suggests a __ level of
inherent risk.

Low
High
Neither
A nor B: ROA is irrelevant to assessing inherent risk

Gammas
current ratio may be distorted because the company

Has not
fully depreciated and amortized all of its fixed assets
Did not
present diluted EPS in its financial statements
Likely
has a high level of bad debts

Part
2: Inherent Risk (IR) Assessment

List four
issues from the summary information on p. 2 that could impact IR at Gamma

Consider
Gammas accounting and financial services personnel, including the
controller, chief accounting officer, and CFO. What is your assessment of
the collective competence of these employees? How does this assessment
impact IR?

What
impact, if any, does the CEOs (Mr. Parker) driving while intoxicated
arrest in 1998 impact IR? Explain your answer.

What is
your IR assessment? Support your conclusion using both the summary
information in this document and the 2014 financial statements, including
the analytical procedures you performed in Part 1.

Part
3: Audit Engagement Staffing

Describe
your responsibility to the public interest in considering Erics issue?
How does this responsibility impact your consideration of whether to
remove him from the Gamma audit?

Will you
allow Eric to serve on the Gamma audit? Explain your reasoning, including
how investors and regulators might view his participation on the audit.

If the
average auditor in practice was in Erics position and was allowed to stay
on the Gamma audit, could this person be objective (be sure to explain
your answer)? What specific advice would you give this person on how to
maintain her/his objectivity?

ACCT 4400Individual Assignment: Audit PlanningAssignment
Background: Capstone Core Objective AssessmentThis assignment involves planning the audit
for a hypothetical audit client, and serves as a capstone assessment. By
completing this assignment, you will demonstrate each of the following core
objectives:
Critical Thinking Skills (CT) – to include creative thinking, innovation, inquiry, and analysis,
evaluation and synthesis of information
Communication Skills (CS) – to include effective development, interpretation and expression of
ideas through written, oral and visual communication
Empirical and Quantitative Skills (EQS) – to include the manipulation and analysis of numerical data or
observable facts resulting in informed conclusions
Social Responsibility (SR) – to include intercultural competence,
knowledge of civic responsibility, and the ability to engage effectively in
regional, national, and global communitiesThe
information and questions needed to complete this assignment begin on page 2.2015
Audit of Gamma Industries: Summary of InformationAssume you are an audit manager, today is
April 15, 2015, and your public accounting firm is currently planning the 2015
financial statement audit of Gamma Industries, a public company using a 12/31
year-end (for this assignment, focus only on the financial statement audit). Gamma
is a new client for your firm. Gamma manufactures medical equipment, and sells
these machines to hospitals, out-patient surgery centers, and medical offices.
The audit partner has asked you to help plan the audit for this new client using
the following information obtained and summarized by the engagement team:This morning, the audit senior for the
Gamma audit, Eric Wall, disclosed to you that his aunt owns a material (to her)
amount of Gammas common stock. Eric told you he does not believe his
independence is impaired and wishes to stay on the Gamma audit.Please see the accompanying Excel file for
Gammas 2014 financial statements.Questions
to Submit to the ProfessorThese
questions address issues related to audit planning such as analytical
procedures, inherent risk assessment, and audit engagement staffing. Per the
syllabus, you must submit two versions: hard-copy in class on the due date and
an electronic version through Turnitin via Blackboard. You must also record the
multiple choice questions on the scantron provided by your instructor.QuestionsPart
1: Analytical Procedures using the 2014 Financial Statements Part
2: Inherent Risk (IR) AssessmentPart
3: Audit Engagement Staffing”