Please help with mini audit project

Please answer question 3&4

3. Assess the preliminary materiality based on the policy provided (WP 1-13), and completeWP 3-5, assuming moderate risk and satisfactory results of the analytical procedures(your answer should provide only one materiality measure, i.e., decide on the mostappropriate base, and use the most appropriate percentage)

4. Complete the audit of the accounts receivables:a. Calculate the sample size for A/R confirmation by following steps in WP 25-2.b. Assume that you received answers for all of the confirmations and only one ofthem indicated that the balance is wrong. The balance recorded is $598,000, butthe correct amount is $589,000. Prepare an adjusting entry on WP 25-5.c. Complete the A/R lead sheet WP 25-1, and complete the conclusions box bystating whether this account is fairly stated or not. (Ignore the allowance fordoubtful accounts).

Mini Audit Project
Your firm, ACTG 307 & Associates, is engaged to audit the financial statements of XYZ
Corporation. It is a private manufacturing company that is considering going public in three to four
years. Your firm has been preforming audit services to this client for the past five years. The
client requires financial statements audits for monitoring purposes, but mainly to receive finance
and loans from banks. The management team has high level of competence and integrity, and
based on the other team’s assessment of internal control, the control risk is low.
Another team did most of the audit tests and completed most of the audit work papers (WP). Your
team is assigned to complete the work papers and audit tests of the engagement. Specifically, your
team is required to do the following:
1. Write an engagement letter, dated 11/6/2020, by completing WP 2-1.
2. Perform the preliminary analytical procedure WP 3-1 and 3-2 and comment on:
a. The client liquidity, profitability and solvency.
b. The client ability to continue as a going concern.
3. Assess the preliminary materiality based on the policy provided (WP 1-13), and complete
WP 3-5, assuming moderate risk and satisfactory results of the analytical procedures (your
answer should provide only one materiality measure, i.e., decide on the most appropriate
base, and use the most appropriate percentage).
4. Complete the audit of the accounts receivables:
a. Calculate the sample size for A/R confirmation by following steps in WP 25-2.
b. Assume that you received answers for all of the confirmations and only one of them
indicated that the balance is wrong. The balance recorded is $598,000, but the
correct amount is $589,000. Prepare an adjusting entry on WP 25-5.
c. Complete the A/R lead sheet WP 25-1, and complete the conclusions box by stating
whether this account is fairly stated or not. (Ignore the allowance for doubtful
accounts).
5. Complete the audit of inventory:
a. Assume that all the steps of the inventory audit program were done and the
misstatements were only found in the machinery account, AC# 200-101.
b. You need to complete WP 30-1, 30-5 and 30-15.
6. Assuming that all other tests came to be satisfactory, prepare an audit report, with the
appropriate opinion (dated 2/21/2021).
7. Complete the project by having all of the required work papers with a cover page that has
your group number and names of the group members, in one word document, and
drop it in the drop box on D2L by the midnight of Wednesday 11/22/2023. No late
assignment will be accepted.
Notes:
1. Comparative income statements and balance sheets are provided.
2. Make sure to initial every document. [If you are from group # 1, your initial will be G1].
3. Five points will be deducted for each error or omission, including, but not limited to,
missing initials, missing a date, wrong calculations, wrong conclusions, etc.
4. Submitting the wrong audit report or submitting two different audit reports will lead a loss
of 20 points.
5. Watching the lecture videos for the related chapters will be very helpful.
WP 1-13
ACTG 307 & ASSOCIATES, CPAs
POLICY STATEMENT
Professional judgment is to be used at all times in setting and applying
materiality guidelines. As a general guideline, the following policies are to be
applied:
1. The combined total of misstatements in the financial statements
exceeding 10 percent is normally considered material, less than 5 percent
is presumed to be immaterial in the absence of qualitative factors.
Between 5 percent and 10 percent require the greatest amount of
professional judgment to determine their materiality.
2. The 5 percent to 10 percent must be measured in relation to the
appropriate base. Many times there is more than one base to which
misstatements should be compared. The following guides are
recommended in selecting the appropriate base:
a.
Income statement. Combined misstatements in the income
statement should ordinarily be measured at 5 percent to 10 percent of
operating income before taxes. A guideline of 5 percent to 10 percent
may be inappropriate in a year in which income is unusually large or
small.
b.
Balance sheet. Combined misstatements in the balance sheet
should originally be evaluated for current assets, current liabilities, and
total assets. For current assets and current liabilities, the guidelines should
be between 5 percent and 10 percent. For total assets, the guidelines
should be between 3 percent and 6 percent.
3. Qualitative factors should be carefully evaluated on all audits.
WP 2-1
ACTG 307 & Associates
Certified Public Accountant
2500 Michigan Ave.
Chicago, IL 60000
Mr. John Smith, Chairman of the Board
XYZ Corporation.
36 Bryn Mawr St.
Chicago, IL 60625
Dear Mr. Smith,
WP 3-1
XYZ Corp.
Ratio Analysis
12/31/2020
Liquidity Ratios:
Current ratio
current assets / current liabilities
Quick ratio
(current assets – inventory) / current liabilities
Number of days sales in A/R
net ending receivables / (net sales / 365)
Inventory turnover
cost of sales / average inventory
Profitability Ratios:
Gross profit margin %
gross profit / net sales
Income before tax / owner’s equity
net income before taxes / owner’s equity
Income before tax / Total Assets
net income before taxes / total assets
Sales / Total Assets
net sales / total assets
Sales / Working Capital
net sales / (current assets – current liabilities)
Solvency Ratios:
Owner’s equity / total assets
Owner’s equity / total assets
Current liability / Owner’s equity
Current liability / Owner’s equity
Total liability / Owner’s equity
Total liability / Owner’s equity
2020
2019
WP 3-2
XYZ Corp.
Preliminary Analytical Procedures – Conclusions of Ratio Analysis
12/31/2020
Liquidity:
Please write your conclusions and comments on the client liquidity ratios here.
Profitability:
Please write your conclusions and comments on the client profitability ratios here.
Solvency:
Please write your conclusions and comments on the client Solvency ratios here.
Going concern:
Please write your conclusions and comments on the client’s ability to continue as a going concern
based on the above ratio analysis here.
WP 3-5
XYZ Corp.
Preliminary materiality Judgment
Measurement base
Percentage Applied
(e.g., income, revenue, assets)
Preliminary materiality
$
(put the name of the base here)
$
%
(rounded)
WP 25-1
XYZ Corp.
Accounts Receivable Lead sheet
Account name and Number
100-101 Accounts receivable
Unadjusted
Balance
??
Adjustments
??
Conclusions:
The accounts receivable account is ????? (fairly on NOT fairly stated)
Adjusted
Balance
??
WP 25-2
XYZ Corp.
Calculation of Sample Size
Book value of recorded population
Book value for individual material accounts
(test all of them)
Book value for all remaining accounts
(test only a sample)
Performance materiality
Confidence factor
(From table above assuming ROIA of 10%
and Ratio of expected to material misstatement
of 5%)
Sample size*
Total accounts to be confirmed
= $26,388,000 (150 accounts)
= $ 17,462,207 (20 accounts)
= $8,925,793
= $393,000
= ??
= ?? accounts (round up)
= ?? accounts
[*Sample size = confidence factor / (Performance materiality / Population value)]
Hint: population value in the equation above is the population value that you selected a sample
from.
WP 25-5
XYZ Corp.
Adjusting Entries – Accounts Receivable
Account
Dr.
Cr.
WP 30-1
XYZ Corp.
Inventory Lead Sheet
Account name and Number
200-101 Inventory _ Machines
Unadjusted
Balance
$9,634,800
200-102 Inventory _ Parts
$3,028,080
0.0
??
200-103 Inventory _ Supplies
$1,101,120
0.0
??
Total
??
??
??
Adjustments
??
Adjusted
Balance
??
Conclusions:
The inventory account is ????? (fairly on NOT fairly stated)
[Hint: calculate the projected misstatement in WP 30-15 and see if it is material]
WP 30-15
XYZ Corp.
Results of Inventory Valuation Tests
Summary of Misstatements:
Item #
Recorded
Value
Lower cost or
Replacement
150-201 [Machines]
151-520 [Machines]
$218,520
$150,000
$216,620
$150,860
151-620 [Machines]
$180,300
$179,000
Net Misstatement in
the sample
Amount of
Notes
misstatement
– over
(under)
$1,900
($860)
Shipping
cost was not
included
$1,300
$2,340
Recorded amount of inventory is
Sample size is
$13,764,000
$4,300,000
The projected misstatement is
$???
WP 30-5
XYZ Corp.
Adjusting Entries – Inventory
Account
Dr.
Cr.
XYZ Corporation
ANNUAL BALANCE SHEET
($ thousands)
ASSETS
Cash & Equivalents
Net Receivables
Inventories
Prepaid Expenses
Other Current Assets
—————–Total Current Assets
Gross Plant Property & Equipment
Accumulated Depreciation
—————–Net Plant Property & Equipment
Investments at Equity
Other Investments
Intangibles
Deferred Charges
Other Assets
—————–TOTAL ASSETS
LIABILITIES
Long Term Debt Due In One Year
Notes Payable
Accounts Payable
Taxes Payable
Accrued Expenses
Other Current Liabilities
—————–Total Current Liabilities
Long Term Debt
Deferred Taxes
Investment Tax Credit
Other Liabilities
—————–TOTAL LIABILITES
Redeemable Noncontrolling Int.
EQUITY
Preferred Stock – Redeemable
Preferred Stock – Nonredeemable
—————–Total Preferred Stock
Common Stock
Capital Surplus
12/31/2020
12/31/2019
12/31/2018
24991
26388
13764
0
12864
—————–78007
63750
12349
—————–51401
9201
18500
5947
0
31464
—————–194520
29514
25606
13642
0
14908
—————–83670
44078
9275
—————–34803
8350
16006
6410
0
28438
—————–177677
30240
22813
14039
0
14409
—————–81501
36679
7429
—————–29250
8094
14354
7228
0
25917
—————–166344
0
19562
24062
0
5865
21977
—————–71466
43549
0
0
39182
—————–154197
0
0
14988
22529
0
5726
22458
—————–65701
31853
0
0
44099
—————–141653
0
0
14158
23621
0
4844
19789
—————–62412
22025
0
0
38733
—————–123170
0
0
0
—————–0
15
27607
0
0
—————–0
16
28937
0
3109
—————–3109
15
28780
Retained Earnings
Less: Treasury Stock
—————–Common Equity
—————–Stockholder’s Equity – Parent
Nonredeemable Noncontrolling Int.
—————–Stockholder’s Equity – Total
—————–TOTAL LIABILITIES & EQUITY
COMMON SHARES OUTSTANDING
12249
0
—————–39871
—————–39871
452
—————–40323
—————–194520
1500
6504
0
—————–35457
—————–35457
567
—————–36024
—————–177677
1600
10703
0
—————–39498
—————–42607
567
—————–43174
—————–166344
1500
21/31/2017
28096
14439
14714
0
12747
—————–69996
31662
5817
—————–25845
6883
6954
8782
0
30962
—————–149422
4629
889
25166
0
5063
18245
—————–53992
10532
603
0
47295
—————–112422
0
0
10391
—————–10391
14
23834
2005
0
—————–25853
—————–36244
756
—————–37000
—————–149422
1366.374
XYZ Corporations
ANNUAL INCOME STATEMENT
($ Thousands
EXCEPT PER SHARE)
Sales
Cost of Goods Sold
—————–Gross Profit
Selling, General &
Administrative Expense
—————–Operating Income Before Deprec.
Depreciation, Depletion &
Amortization
—————–Operating Profit
Interest Expense
Non-Operating Income/Expense
Special Items
—————–Pretax Income
Total Income Taxes
—————–Income Before Extraordinary Items
and Noncontrolling Interests
Noncontrolling Interest – Inc Acc
—————–Income Before Extraordinary
Items & Discontinued Operations
Preferred Dividends
—————–Available for Common
Savings Due to Common
Stock Equivalents
—————–Adjusted Available for Common
Extraordinary Items
Discontinued Operations
—————–Adjusted Net Income
Income to Company Incl Extraordinary
Items & Disc Ops
Earnings Per Share Basic –
12/31/2020
12/31/2019
12/31/2018
152356
123800
—————–28556
155929
131657
—————–24272
155427
130909
—————–24518
11530
—————–17026
11756
—————–12516
11910
—————–12608
7219
—————–9807
2160
2914
-2843
—————–7718
-1897
——————
6238
—————–6278
1899
2987
-3120
—————–4246
228
——————
5908
—————–6700
1130
2297
-409
—————–7458
2127
——————
9615
-72
——————
4018
69
——————
5331
-15
——————
9687
0
—————–9687
3949
1145
—————–2804
5346
1576
—————–3770
0
—————–9687
0
0
—————–9687
0
—————–2804
0
0
—————–2804
0
—————–3770
0
0
—————–3770
9615
4018
5331
Excluding Extra Items & Disc Op
Earnings Per Share Basic Including Extra Items & Disc Op
Earnings Per Share DilutedExcluding Extra Items & Disc Op
Earnings Per Share Diluted Including Extra Items & Disc Op
EPS Basic from Operations
EPS Diluted from Ops
Dividends Per Share
Com Shares for Basic EPS
Com Shares for Diluted EPS
6.11
1.75
2.71
6.11
1.75
2.71
5.91
1.65
2.38
5.91
5.01
4.87
1.38
1586
1640
1.65
3.06
2.9
1.2
1605
1687
2.38
2.88
2.52
0
1393
1676
21/31/2017
152256
132229
—————–20027
13593
—————–6434
5888
—————–546
889
2958
-31310
——————28695
-34831
—————–6136
-52
—————–6188
859
—————–5329
-470
—————–4859
0
0
—————–4859
6136
3.1
3.1
2.92
2.92
0.23
0.23
0
1566
1675