You and your firm, Keller CPAs, have never audited a dog food manufacturer. Although it is late in the year to be accepting a new calendar year-end audit, you need the work and have the time to devote to the audit before your 2-week ski vacation in February.

You begin the audit process just prior to year-end by sending your audit manager, Pete, and two audit staffers, Ben and Maureen, out to the client. They spend time assessing the client and planning the audit.

During the first month of field work after year end, Ben and Maureen note that the dog food bags piled high on the docks are marked "Returned." One employee is seen throwing bags of the premium Best Boy Gourmet dog food into the dumpster in the morning and pulling it out and throwing it into Henry's car during the employee lunch hour.

Pete's new best friend, Alan, was married to Smackey Dog Food, Inc.'s owner, Kim, 4 years ago. Alan is also good friends with the banker from whom Sarah is seeking the loan. Pete is unaware of the relationship. Pete has talked about some of the details of the audit to Alan over a few beers.

REQUIRED: You will prepare one, short (5-7 pages, double-spaced) paper based on the Smackey Dog Food, Inc. case facts above. The purpose of the Project is to move you beyond the black letter into the actual practical application of legal principles in real-life situations. It serves to highlight the importance of audit opinions and reports. This project gives you an opportunity to conduct certain audit procedures and determine the course of action regarding the audit.

You are being graded on analyzing issues you identify in the project case.

Questions:

Q1: Discuss how the SEC has influence (if any) over the audit of Smackey Dog Foods, Inc.

Q2: Discuss the essential activities involved in the initial planning of an audit. How do these all specifically to the Smackey Dog Food client?

Q3: Discuss the 4 stages of the audit and the major activities performed by the auditor in each phase. Give an example of how each of these specifically applies to the Smackey Dog Food, Inc audit. For instance, examine the apparent internal control weaknesses and possible negative outcome of each.

Q4: Describe Keller CPAs' responsibilities related to communications regarding internal control matters. What internal controls issues do you identify?

Q5: You decide that you will address Smackey Dog Food, Inc.'s accounts receivables through confirmations. Discuss the various types of confirmations and what forms you will implement and why?

Q6: What are the major factors affecting sample size for confirming accounts receivable?

Q7: A major issue in verifying the ending balance in property, plant and equipment is the possibility of legal encumbrances. Discuss what specific concern do you have. Describe the procedures your firm will perform to obtain evidence about existing legal encumbrances.

Q8: The client wants to know if you will be present at the year-end inventory. What is your decision and why? What role or actions will you take at the inventory if you decide to attend the inventory. Why?

Q9: Considering the general six functions that make up the inventory and warehousing cycle for Smackey Dog Foods, Inc., identify the related documents and/or records that would be used. From your analysis of the internal controls related to the inventory and warehousing cycle of Smackey Dog Foods, Inc., what internal control weaknesses exist?

Q10: Discuss if Keller CPAs or its auditors are breaching any Professional Rules of Conduct and why or why not?

Q11: Discuss the CPA firm's legal liability concerns for this audit if they make a material unintentional or intentional mistake. Include any other legal liability concerns regarding possible Professional Rule violations.