Unit: ACC305 – Auditing and Professional Practice
Submission Date: 02-Feb-2015before 4.00 pm
Total Weight: The
assignment is worth40% of the total unit weight.
Students are required to cover all stated requirements.
2. Your answer must be both uploaded to Moodle in word file and
handed over a printed copy.
3. You need to support your answers with appropriate Harvard style
references where necessary.
4. The Business plan should not be more than 2000 words in length
with a table of contents.
5. Only include information in your appendixes that has been directly
referred to in the body of your document.
6. Include a title/cover page containing the subject title and code
and the name, student id numbers.
Please save the document as
ACC305AT2_first name_Surename_Student Number
Thomas Smith, a senior accountant with
Dalen & Jay, CPAs, has recently been assigned as in charge auditor of
Mathra Tool, Inc. (MTI), a long time audit client of his firm. MTI is owned by
George Mathra, an experienced machinist. George established the business over
20 years ago, and it has grown into a $10 million-a-year business, with an
excellent reputation for high quality machined parts. MTI has clients in the
automobile sector and the health care sector and has recently begun producing
parts for environmentally friendly products, such as recycling containers, due
to the business's versatility in dealing with a variety of metals as well as
Information Systems and Business
The following description is based
upon Thomas's review of prior working paper files and planning discussions with
personnel of MTI.
MTI has a broad range of equipment,
ranging from grinders, stampers, cutters and small presses to numerically
controlled machining and turning centers, some that individually cost over
$250,000. This latter group of equipment is tied into the company's computer
aided design and manufacturing (CAD/CAM) system, used by the four senior tool
and die personnel.
Machining and turning center suppliers
have helped MTI develop efficient operations, by furnishing sample numerical
control programs for standard machine operations and by providing training to
employees. One of the suppliers unfortunately sent sample programs that had
been infected with a virus. George's daughter, Tiffany, had to cleanse the
servers and each of the machines, using her copy of an anti-virus software.
When contacted, the supplier did not know that his software was infected and
The four CAD/CAM terminals and
printers are connected to the company's local area network (LAN), which is
maintained by Tony Lee, the owner of a computer shop conveniently located three
blocks away. All computer equipment, software and supplies are purchased from
Mr. Lee, who is responsible for attaching and maintaining equipment, upgrading
software and maintaining user security profiles on the network. There is one
user identification and password for accounting (shared by Tiffany, George and
the accounting clerk). Each of the plant supervisors has his own password, and
a common password is used to initiate the timekeeping system. The two word
processing staff members have their own password and use the common accounting
password when they need to do data entry.
A standard routine has been set up to
back up the accounting systems. One of the accounting staff inserts one of
seven tape cartridges into the system at the end of the day (they are labeled
with the day of the week), so that the company has a full set of backups for
the week. Tiffany keeps these in her office. These are particularly important,
since during the last office move, two years ago, the original disks for the
accounting system were misplaced.
Tiffany Mathra, George's youngest
daughter, has been working in the business for 15 years. She started as a
machine operator and has finished several college diplomas in numeric control
and in accounting over the years. She is being groomed to take over the
business in two years and is proving herself competent both on the shop floor
and in administration. She works along with the tool and die machinists and the
shop supervisors, discussing design problems, quality control methods and
costing of quotes for potential orders. Wednesday morning 7:00 AM meetings are
held by Tiffany and George to maintain a good working relationship with the
supervisors (one purchasing, three production, one design, one quality control)
and to review any problems that need to be addressed in the coming week. This
includes any potential scheduling changes required due to "rush" jobs
that have been accepted or are being quoted.
This good working relationship is
extremely important for satisfying some of the company's larger customers. MTI
has paid for computer equipment for each of the supervisors, so that they have
fully functioning microcomputers at home. If a rush job requires weekend work,
then these senior personnel
can work at home
to get the necessary quoting or design work completed. Since the "at
home" systems are identical with the office systems (Mr. Lee simply copied
the image from the MTI systems to the home computer hard drives), diskettes can
easily be taken home and then brought back to the office. It is understood that
when work slows down, a day off can be taken to compensate for this weekend
years ago Tiffany arranged for the implementation of the network and the
purchase of a standard integrated accounting package (general ledger, order
entry/accounts receivable, purchases/payable, payroll), and for the purchase of
the job costing and timekeeping system. The job costing package is used to
prepare and print quotes. For automotive customers, the quote is entered into
the stand alone electronic data interchange (EDI) system for transmission.
Customer purchase orders received via EDI are simply printed and filed. Once a
quote has been accepted, the job is given a unique job number. The job control
sheets include a list of the machining center, labor and quality control tasks,
each with a unique optical scanning label used by the employees to "sign
in" and "sign out" of particular tasks by machine type and by
operation. Standard control sheets are also used for overhead tasks, such as
cleaning or machine setup. Employees have plastic cards with their employee
number coded. They use a laser pen to scan their employee number, the job
number and the operation label for each activity, as it is commenced or
completed. To sign out, they simply scan their employee card again.
A variety of reports are printed
daily, weekly, or monthly from the costing system; these are used for
monitoring employee hours, the status of jobs, the costs accumulated for
particular jobs and the work-in-progress inventory. The weekly report of hours
from the costing system is approved by the production supervisors and is used
as a data entry input source into the payroll system for hours worked. The
accounting clerk enters the hours into the accounting system, so that weekly
payroll checks and reports can be produced. When volume is high, one or both of
the administrative staff assist. The administrative staff also do filing or
document matching, as necessary.
Tiffany is really pleased with her
accounting clerk, Isabel, who has been with the company for three years. She
insists that fate had a hand in getting Isabel for MTI. Isabel was
"pounding the pavement," having recently immigrated, and had no local
business experience. Her accounting skills were rudimentary, but she quickly
learned the accounting software and has reorganized the filing system. Tiffany
considers her indispensable. When Isabel goes on vacation, many things simply
don't get done. Tiffany can do the payroll in a pinch, but Isabel always does
accounts payable and cash disbursements. If she's away, suppliers are simply
told to wait, or Tiffany issues a manual check, which is recorded later. Isabel
is very good at responding to queries from suppliers and ensuring that new
suppliers are set up properly. The purchasing supervisor and his staff rely on
Isabel, for she checks the account allocation of purchases and makes any
necessary corrections. Isabel also ensures that necessary EDI acknowledgments
are sent and reports printed.
Tiffany and George are signing
officers, although Tiffany realizes that she checks supporting materials more
thoroughly than George, who usually just queries Isabel verbally about larger
purchases. George normally handles the bank deposits, while Tiffany does the
monthly bank reconciliation. Every three months, an accountant from Dalen &
Jay reviews the regulatory returns for reasonableness, as well as journal
entries made in the last three months. He updates the recurring journal entries
and advises Tiffany of any changes in procedures or modifications to monthly
journal entries that are required to help ensure accuracy and completeness of
transaction processing. Tiffany runs the standard financial statements every
month from the accounting package, but normally some additional adjustments are
required when the accountant comes in. These are adjustments to depreciation
expenses, changes to prepaid expenses and some account reallocation (e.g.,
repairs and maintenance to capital accounts) based on discussions with Tiffany.
The regular technician assigned to MTI is Louis Jaborwock, who has just
completed the most recent month end entries.
Louis informed Thomas that MTI had a
problem one of their systems on Friday. Apparently, one of the servers might
have "crashed." Luckily, this was the server with the accounting
systems and was fully backed up on tape. A new server was to be installed the
next day, and Mr. Lee was reconfiguring the network so that the remaining
systems could function from the single server.
The engagement partner from Dalen
& Jay believes that MTI's growth may have expanded the company sufficiently
to warrant increased levels of controls reliance during the audit. She is
particularly interested in work-in-progress (WIP) inventory, the largest item
on the balance sheet, typically close to three months' sales. She has requested
an updated controls analysis and that computer assisted audit techniques using
the firm's generalized audit software be considered. To this end, Thomas has
updated the narrative description associated with WIP inventory.
To calculate the WIP inventory for any
particular month, one of the purchasing staff transfers data from a report in
the job costing system into a spreadsheet (exhibit 1).2 Since the job costing system does not
have sales information, progress billings are added manually, and the
spreadsheet total is used for the monthly financial statement's
The purchasing clerk has explained the
contents of her spreadsheet and described the origin of the information.
Following is an explanation of the spreadsheet on a column by column basis:
Job number: A unique job number is assigned by
one of the production supervisors. There is a manuallog in the
production area, and the supervisors write down the customer, purchase order
number and the job numbers used. Where a purchase order lists multiple parts, a
different job number must be used for each part produced.
Customer code: Each customer has a unique customer
code. Tiffany assigns these codes, so that thesame code can be used in
the accounting and in the job-costing system.
Customer Purchase Order Number: These match the purchase orders
received from customers.
Due Date and Scheduled Completion Date: The customer purchase order will
indicate the date that anorder is due. The production supervisors will
schedule the job so that it is completed prior to the due date.
Part Number and Part Description:
MTI always uses the part numbers of its customers and thecustomer
description when describing parts being produced. These must match customer
Quantity Ordered: The quantity ordered on the purchase
order is entered into the job costing system.
Quantity on Hand: The quantity on hand is based upon
the figures in the costing system. This is initiatedwith the first
operation. For example, if component parts are purchased and then additional
work is done on a component part, then the quantity on hand is based upon the
parts purchased. If raw material is purchased and cut on the premises, then the
person who completes the first operation notes the quantity cut, for subsequent
entry by the production supervisor. Any damaged parts that cannot be passed on
to the next operation are reported to the quality control staff, who enter the
part into the system as damaged, thereby reducing the quantity on hand. All
data entry is accomplished using the common job costing password. Such entries
will show on a damaged-parts report, which is discussed every Wednesday at the
operation on the job control sheet is assigned a percentage of the job. Thesystem
tracks which operations have been completed and reports the percentage complete
based upon the last operation that has been fully completed for all the parts.
Quoted Costs (labor center, materials,
total): These costs
are all listed at a rate-per-individual-unit part.Labor center rates
are based upon standard rates that have been developed by George and Tiffany.
They include the labor rate of the employee multiplied by a factor, depending
upon the machine used. The factor incorporates both plant overhead charges plus
machine charges. The lowest factor is 2.5, the highest 23. Thus, an employee
earning $10 per hour would result in a labor center cost at the lowest
factor of $25 per
hour and $230 per hour at the highest factor. Material cost is based upon
quotes from suppliers, plus a Thomasup. Some customers have a fixed arrangement
with the Thomasup as low as 5 percent, while others are Thomased up as much as
150 percent. During the last year, the company has changed its costing and
overhead allocation methods to absorption costing, based upon the accounting
firm's advice. MTI reduced its labor center factors by 10 percent and added a
flat materials handling charge ($50) and ordering charge ($25) to each of its
As work is completed and supplier invoices are received, these costs are
enteredinto the job costing system. Actual hours worked on an operation
may be higher or lower than quoted. The hours worked are automatically posted
using the timekeeping system. The production supervisors review each daily
printout of hours worked, to ensure that employees have properly clocked out.
supervisors must approve any job cost system adjustments, which are entered by
one of the purchasing staff. As supplier invoices are received, they are
recorded into the job-costing system by the purchasing staff and then forwarded
to Isabel for entry into the accounts payable system.
Sales Price: This is the price that the customer
has agreed to pay, according to the purchase order.
Progress Billings: Normally, MTI does not request
advance payments or progress billings. However, if acustomer is new or
a part requires a substantial material purchase, an advance payment is
requested to cover the cost of the material. MTI then considers this material
as already owned by the customer and deducts this progress billing from the
cost of its WIP.
Work-in-Progress Inventory Value: Isabel updated the spreadsheet
template this year, applying aformula to calculate inventory as
follows: ([quantity on hand] x [percentage complete /100] x [actual cost to
date]) - progress billings. She reviews the inventory list prepared by
purchasing for one of two necessary adjustments. First, if a job has not been
started it will show as zero percentage complete. Sometimes, parts have been
ordered on a subcontract basis and been placed into production. Then, the WIP
value must be increased from zero to the value of these parts. Second, if a job
has an overrun and the actual costs exceed the sales price, then the value of
the inventory must be reduced so that it does not exceed the sales price.
Isabel makes these changes by manually scanning the inventory listing and
changing the inventory value for these items.
The engagement partner has requested a
meeting tomorrow to discuss audit plan for MTI She has requested several
documents for that meeting.
preliminary audit plan assessing internal control risk and providing
preliminary judgment for detection risk.
2. A description of specific substantive
procedures that could be conducted for the WIP inventory.
You are required to justify the audit
plan by referring to theoretical grounds learnt from this unit.
Expected length: 2,500 words
Assessment Marking Criteria
Assessment Task:Group Assignment
Unit Learning Outcome(s)
of early stage learning about:
Explain and analyse the nature, underlying
concepts and principles of auditing
apply and critically analyse the processes and auditing standards used to
determine appropriate audit procedures
appropriate level of independent thinking and creativity, and critical
analytical skills to be able to reach, explain and implement decisions relating
to the audit function and critically evaluate selected audit issues (including
auditing standards) that relate to different types of accounting transactions.
Knowledge Development (30%)
Discussion of the theoretical concepts of risks assessment,
tests of control and substantive procedures and how the
audit planning should be conducted.
of relevant theoretical perspectives.
of theory in literature to the question.
of case scenario to support
of critical thinking in the argument/discussion.
of a convincing and effective written
that meets academic standards in
relation to clarity, logical structure, coherence, expression
and technical aspects (grammar, spelling, referencing).