Order ID 53563633773 Type Essay Writer Level Masters Style APA Sources/References 4 Perfect Number of Pages to Order 5-10 Pages Description/Paper Instructions
I. Title: Marco Appliances Inherent Risks and Control Design Project
Prepare Inherent Risks and Control Design Assessment.This course project/case study is divided into the following sections:
I. Title
II. Introduction
III. Steps to Completion
IV. Deliverables
V. RubricYou will complete the Steps to Completion. The due dates for the completion and submission are stated in the syllabus. Steps to completion start on page 13. Deadlines are listed in the syllabus.
II. Introduction
All files related to Project 2 are located in: Content/Course Resources/Projects & Rubrics/Project 1 Marco Appliances.
This project provides opportunities for you to further develop the following competencies
Graduate School Core Competencies:
Communication• Learners demonstrate ability to communicate clearly both orally and in writing.
• Organize document or presentation clearly in a manner that promotes understanding and meets the requirements of the assignment.
• Develop coherent paragraphs or points to be internally unified and function as part of the whole document or presentation.
• Provide sufficient, correctly cited support that substantiates the writer’s ideas.
• Tailor communications to the audience.
• Use sentence structure appropriate to the task, message and audience.
• Follow conventions of Standard Written English.
• Create neat and professional looking documents appropriate for the project or presentation.
• Create clear oral messages.Critical thinking
• Identify and clearly explain the issue, question, or problem under critical consideration.
• Locate and access sufficient information to investigate the issue or problem.
• Evaluate the information in a logical and organized manner to determine its value and relevance.
• Consider and analyze information in context to the issue or problem.
• Develop well-reasoned ideas, conclusions or decisions, checking them against relevant criteria and benchmarks.Accounting Competencies
Risk assessment, analysis, and management Identify known risks using organizational knowledge
Analyze risks using mandatory and voluntary frameworks designed to detect internal controls risks and external threats to the accounting systems and other functional areas of the organizationMeasurement, analysis, and interpretation
Review and identify relevant, reliable, and verifiable measurements
Measure and analyze the data
Interpret the results of analysis for stakeholdersResearch
Identify and access relevant professional frameworks, standards, and guidance
Apply most appropriate professional frameworks, standards, and guidance to given fact patterns
Analyze information to make more informed decisionsBusiness Competencies
Process and Research Management
Identify concepts and techniques for business planning, operations and evaluation processes, as well as resource management, and consider how they are used in an organization.Governance perspective
Identify relevant legal and regulatory environments affecting the organization
Explain legal and regulatory environments affect the organizations operations, internal controls, and enterprise risk managementProfessional Competencies:
Professional Behavior
Behave in a manner bound by ethical principles for the protection of society, including upholding the AICPA Code of Professional Conduct, ethical standards of other professional accounting organizations, the graduate accounting degree program, and the graduate school of UMGC.Scenario:
After working as a financial accountant for a number of years, you decide to apply for a position you learned about from a virtual career fair offered by UMUC’s Career Services. The most prestigious accounting firm in the District of Columbia, Levin, Song, & Wolod were looking to hire several accountants and preferred UMUC graduates given the reputation of its graduate accounting programs. Shortly after the virtual fair, you receive a certified letter in the mail stating: Your application for an auditing position been approved by the Supervising Senor Auditor.Please contact our Human Resources Department at 201-000-0000 to continue in the hiring process. We look forward to having you on the Levin, Song, & Wolod team.
Within a few months, the Supervising Senior Auditor (your professor) assigns you to a team auditing Marco Appliances, Inc. The Supervising Senior Auditor calls to say I’m assigning you to this particular audit team because it will provide you with a good opportunity to demonstrate your knowledge and skills on a portion of the audit process of a valued client, Marco Appliances, Inc. a small appliance wholesaler. You’re very familiar with Marco Appliances because your parents, who owned a retail appliance store decades ago, purchased inventory from Marco Appliances.The auditing team is led by the Supervising Senior Auditor who will be making recommendations to the Manager of the engagement, structuring the parts of audit, and presenting the results of a preliminary review to the Manager.
Marco has been audited in each of the last five years by a small, local CPA firm. However, your firm has been engaged to do an audit for 2015.
Marco Appliances, Inc. (Marco) is a small firm with about 50 total employees including corporate officers. It specializes in supplying a relatively small line of high-quality household appliances to residential construction contractors in a large and growing metropolitan area. Marco has a large list of customers, mostly custom builders of single-family dwellings and some large builders of single and multiple family units.Marco’s basic marketing strategy is to have inventory available at all times and to sell this inventory at competitive prices. At the end of every quarter, the President, Drew Black, reviews product costs and adjusts the authorized selling prices of products as necessary. He makes the selling price adjustments based on his assessment of what his competitors will do with pricing and what is required to provide competitive profits to the owners of Marco.
Table 1: A summary of major personnel and their position in the company
Personnel Position
Harper Kim Secretary / Treasurer
Cooper Teal Bookkeeper
Dakota Amalia Controller
Drew Black President
Harley Magenta Major shareholder, Chairman of the Board
Stephen Violet Accountant
Montana Green Retired CPA and Board Member
Mr. Zen Marketing ManagerThe global recession in 2008 affected the wholesale appliance industry, which has had a slow economic recovery since, but is showing signs of recovery. Before the recession, the industry’s gross sales were growing at a real rate of about 7% per year, with the usual wide variations from year to year due to fluctuations in the residential housing starts. During the recession, Marco sales fell 15%. However, real growth rates for the industry are starting to increase to about 3% in the current year. Marco management expects future growth in the industry to be around the same level for the next three to five years. Mr. Zen’s market strategy does not seem to be very effective because Marco sales have not grown as fast as the industry in recent years and fell more than the industry during the recession.
Marco facilities are located in a single warehouse and office building adjacent to a railroad siding and a major highway. Warehouse personnel simply unload rail deliveries with the forklifts and flat trucks used to handle inventory inside the warehouse. Customers pickup all purchases in this location: thus, the company avoids maintenance expenses on its own vehicles, which would be incurred if Marco delivered to its customers. However, Marco has an arrangement with a trucking business next door to deliver goods to some customers on FOB shipping point basis. Sales are final when appliances leave the Marco loading dock for customer pickup orders and deliveries.
Marco is a privately held corporation incorporated in the same state in which its home office is located. It operates in its home state and three surrounding states. Stockholders include approximately 300 individuals and businesses. Currently, Marco top management holds over 50% of the stock. The Board of Directors wants to expand operations and is anticipating going public with an initial public offering (IPO) within the next year. Executing an IPO will require the Board to disclose historical financial information.
Marco currently provides audited financial statements to banks when requesting loans and, therefore, has had audits for each of the last five years from the same accounting firm. Because Marco is small, their local bank insisted on adding restrictive covenants to the firm’s last loan agreement.These covenants include a provision that calls the loan immediately and in full, if Marco’s current and debt to equity ratios fall below specified levels. The covenants also set limits on the dollar amount of dividends the firm can pay.
To help stimulate sales and operating efficiency, Marco recently instituted a profit-sharing bonus agreement for its employees, including top management. Management negotiated the plan because employees have gone without raises for several years. The agreement bases employee bonuses on unaudited net income for the past year because of the need to adjust employees’ salaries at the beginning of each year. However, management will adjust future bonuses for any audit adjustments made after the bonuses are set based on unaudited data. The firm sets a bonus pool based on five percent of operating income, which limits the total available to pay bonuses. Management bases individual bonuses on an employee’s position, length of service, and certain specific negotiated terms with individual officers.Marco’s Board of Directors includes its current president, secretary/treasurer, and controller. It also includes two shareholders, who each hold about a 5% interest in the firm, and one retired CPA, Montana Green. While there is no audit committee, the board as a whole takes an active role in hiring and monitoring the firm’s outside auditor. It also relies on the leadership of Mr. Washington to determine the scope of the audit engagement. Mr. Washington was recruited to the Board last year because the prior president and controller retired during the year and, therefore, the current president and controller have been in their positions for less than one year. Management promoted the new controller from within, but they recruited the new president from outside the firm.
Marco selected a new auditor for this year’s audit engagement because their previous auditor had been with the company for five years. The Board felt it was time to get new insights into their operations. In addition, they wanted to hire a larger auditing firm with a more established reputation to support their anticipated IPO.The Control Environment
Marco’s accountant, Stephen Violet, prepares financial statements and various financial statistics for the officers to review monthly. The Board reviews similar statistics on a quarterly basis at the regular Board meetings and questions the officers closely about what is going on in the business. In addition, Mr. Zen personally follows sales figures and gross profit margins.
Supervisors interview all perspective employees for positions they supervise. In addition, at least one of the corporate officers also interviews each perspective employee. Most of the key employees, including the officers, have been with Marco for more than ten years. However, due to the high demand for accountants, Stephen Violet and most of the accounting staff have been employed at Marco for less than 3 years. While Marco checks references for any prospective employee, they do not check criminal records or perform other forms of background checks.
A computer network and personal computers support Marco accounting and inventory management systems. Personal computers are located in the offices and warehouse and a central server handles all accounting and inventory files. Printers are located in areas where employees need printed documents and other records routinely. The computer is used to control and process most transactions, to print documents, prepare accounting records, and prepare periodic financial statements. Marco uses commercial software recommended by their auditor. To date, they have had only the usual startup problems. They have used it for two years and have upgraded it once.
Marco only issues accounts and passwords to employees with jobs requiring computer data entry or access to file information and reports. Passwords are required to enter the system. Access is limited such that employees only have access to the information they need to perform their duties. Access is also limited in nature such that some employees who do not have the authority to enter data have read-only access while those whose jobs require data entry have both read and write access.
Normal access to the files takes place via the software, which subjects any input to various logical and numerical tests. Most input is backed up by paper trails of source documents and other business papers. In addition, the firm uses an Internet service to back up all files on the Internet. Marco manually runs a backup at the end of each day. They have no other Internet presence other than an informational Website that does not allow potential customers to order merchandise.
Marco has a complete set of policies, procedures, and manuals that management requires employees to use. Management is aggressive about updating the manuals and training new employees to ensure they understand the policies and procedures that affect their duties. Management also requires employees to attend brief review seminars on the policies and procedures that affect their positions once a year. These policies include a code of conduct and employees are required to sign a statement agreeing to it when they are hired.
Sales and Collection Processing
Sales Requisitions
Marco uses the PC network to manage inventory, sales requisitions, and sales orders. Sales clerks who can read the perpetual inventory records via their PCs take customer orders. Most orders originate from phone requests, but a few arrive on a walk-in basis and some occasionally come in the mail.Usually, building contractors or their representatives call to get current price quotes and find out if specific appliances are in stock. When goods are available and the price is satisfactory, a sales clerk originates a sales requisition and the process of approving and filling it begins if customers plan to pick up their order the same day. Orders received after 4:00 PM cannot be delivered the same day; buyers are so informed. In addition, sales clerks can immediately inform a caller about out-of-stock items and establish a back order for the customer. Back orders are processed early each day, but before they are filled, the buyers are called back to confirm that the orders are still valid.
To originate a sales requisition, the sales clerk types the appropriate information into his or her PC: customer number, the product(s) identification, and order quantity. The computer system enters the customer’s name and address, and the date of the requisition automatically on all requisitions as originated. The computer keeps track of all customer requisition and order information and prints a requisition form with today’s date on it for transmittal to the controller, Dakota Amalia.
Sales clerks cannot set up new customers in Marco’s computer system. If a new customer calls to place an order, they are referred to Ms. Amalia, the controller, who is the only person authorized to set up new customers in the system.The computer updates the perpetual inventory records by flagging the items as on order as soon as the sales clerk enters the requisition into the system to avoid over-commitment of goods not available due to existing orders that are pending credit approval. However, this is the only way that a sales clerk can alter the perpetual inventory records (i.e., by initiating a sales requisition).
Order Approval
Every few minutes (immediately if things are slow), one of the sales clerks hand-carries the pending requisitions to Dakota Amalia, the controller. The secretary presents them to Ms. Amalia who approves them either immediately, based on first-hand knowledge of the customer’s credit record, or after reviewing the customer’s account record on her PC. Ms. Amalia initials the requisition to indicate approval of the sale and enters an approval for the requisition in the accounting system.When Ms. Amalia enters her approval code, the system creates and prints three copies of a sales order form; assigns a sequential number to it; and moves the sales order record in the computer to the open sales order file. Copies one and two of the sales order are sent to the warehouse where they are held until they can be filled. The approval copy of the requisition form is attached to copy three of the sales order and forwarded to the bookkeeper, Cooper Teal. These forms are filed in the open sales order (physical) file for later matching with delivery advices.
The computer system notifies the sales clerk who originated the requisition when Ms. Amalia approves or disapproves the requisition. If the customer has requested an update on the order, the sales clerks call back the customer to let them know their orders have been approved and that delivery to their driver has been authorized.
If Ms. Amalia disapproves the requisition, the computer system reverses the perpetual inventory entry for the pending sale and removes the record from the temporary customer order file. Sales clerks then call customers Ms. Amalia did not approve to inform them of the situation. If they dispute the denial of credit, they are transferred to Ms. Amalia’ telephone extension.
Delivery
The sales order forms sent to the warehouse represent authorizations to deliver to the contractors or their representatives. The warehouse supervisor assigns one warehouse clerk to fill each order. This clerk typically retrieves each item with a forklift and brings it to the loading dock area of the warehouse. If the receiving driver is already there, the items are loaded directly, one at a time, until the order is complete. Otherwise, the warehouse clerk gathers all of the items and wraps a length of plastic ribbon around the ordered items to keep them separate from other orders. If the loading area becomes congested, the clerk fills the orders only after drivers have arrived.
After the warehouse clerk fills an order, he enters the product quantities, product number, date, and customer number into a warehouse PC. This triggers the printing of a computer dated sequentially numbered four-copy delivery advice. The customer’s driver signs the delivery advice (all copies) to indicate receipt of the complete order and receives the first two copies. Copy three goes into a warehouse file in numerical order. Copy four, along with one copy of the sales order, is delivered to Mr. Cooper Teal. The warehouse clerk’s working copy of the sales order is usually discarded.
Billing
When Mr. Cooper Teal receives a delivery advice, he matches them with the open sales orders and reviews them for agreement in products and quantities ordered and delivered. If they match, Mr. Cooper Teal initials the delivery advice and enters the date of delivery into the open sales order file on the PC. The computer automatically prices the products, calculates product amounts, totals the invoice, and calculates the cash discount, which is 2/10 net 30.The computer then prints a sequentially numbered, four-part sales invoice and writes the specifics of the sale to a daily-computerized sales file. The bookkeeper records the gross sales, not net. Copies one and two of the invoice are mailed to the customer. Copy three is filed by the customer and copy four, along with the delivery advice, sales order, and approved sales requisition, are filed by invoice number.
In the afternoon, Mr. Cooper Teal uses the sales recording software to access the daily sales record, the accounts receivable subsidiary ledger file, and the sales journal file. Sales for the day are posted at their gross amounts to the individual customer’s subsidiary accounts receivable and to the sales journal file. The latter file is accessed monthly by the software to summarize sales by product and to make monthly postings to the general ledger. The subsidiary ledger is used to review customer credit worthiness, to manage collections, and to determine write-offs.
Collections Management and Write-offs
The controller, Ms. Amalia, whose secretary runs the software to produce an aged account receivable trial balance by customer, manages collections. A working trial balance is generated at least once a week and more frequently if collections lag. Ms. Amalia decides what to do about specific accounts. Menu-driven software permits the Secretary to look up individual customer accounts, to write off invoices or whole accounts, and to generate customer statements for invoices past due by any specified number of days. The software also permits the printing of pre-drafted letters to the customers to accompany any of these actions.
It is normal practice for Ms. Amalia to consider write-offs only once at the end of the month. Marco’s general policy is to write off any invoice exceeding six months from the time of sale. However, Ms. Amalia is authorized to make all final write-off decisions. The bookkeeper credits the allowance account if write-offs are subsequently collected. The accounts receivable subsidiary ledger is reconciled to the general ledger monthly.
Once each month, another software routine is used to add interest to customers’ accounts equal to 1% of all invoices past due by 30 or more days. This routine also lists the interest charges by invoice by account in an interest journal, summarizes transactions for the month, and posts the total to the interest revenue and accounts receivable accounts in the general ledger.
Sales Returns
If customers receive incorrect or damaged items, they typically call and indicate they want to return the goods. One of the officers approves the return and notifies the warehouse to accept the returned goods. When the customer returns the goods, a warehouse clerk completes a receiving report. The warehouse retains one copy, the customer’s representative receives a copy, and the bookkeeper receives a copy. Mr. Cooper Teal enters the data for the return and the original sale into his PC. The computer records the return in an open credit memorandum file and prints a two-copy credit memorandum. Mr. Cooper Teal sends the credit memorandum to the controller, Ms. Amalia for approval; she then returns it to Mr. Cooper Teal.
Upon receipt of the signed credit memorandum, Mr. Cooper Teal enters Ms. Amalia initials into the credit memorandum record on his PC. The computer then posts the credit to the customers’ accounts receivable and transfers the credit memorandum information to the sales return file, from which the entries in the Sales Returns Journal are made by the computer system monthly. Marco exchanges defective goods with the good’s supplier for undamaged goods or, if the supplier prefers, the damaged units are disposed of and an allowance is received on the next purchase.
Cash Receipts
The receptionist opens the mail daily, restrictively endorses all checks received, and routes the other mail to appropriate personnel. She separates the checks from the remittance advice (copy two of Marco’s sales invoice) and sends the checks to the Secretary-treasurer, Harper Kim, who prepares the bank deposit slip and takes the deposit to the bank. The bank deposit form is a three-copy form. The first and second copies go to the bank with the checks and Mr. Violet, the accountant, receives the third copy.
The receptionist forwards the remittance advices to Mr. Violet, who first reviews them for appropriateness of any discounts taken and enters them into a daily cash receipts file on his PC. After printing a listing of the remittance file and reconciling it to the deposit slip copy provided by Ms. Kim, Mr. Violet runs software that posts the individual receipts, to include the amount of any cash discounts, to the customers’ accounts receivable and the total to the cash receipts journal file. The day’s remittance advices are filed by customer number and the copy of the deposit slip is filed by date.
Purchases and Payments Processing
Merchandise Purchases
Each morning before the first sales orders are processed, the bookkeeper, Mr. Cooper Teal, runs the software routine that combines (1) the current perpetual inventory quantity, less items flagged as on order by customers, plus any inventory orders in transit for each inventory item with (2) the reorder stock quantities for each item set by Mr. Zen and the warehouse foreman. When the current quantity of an item is below the reorder level, telephone price quotes for the standard order quantity are sought from various distributors. The computer prints a sequentially numbered, five-copy purchase order form addressed to the supplier who quoted the lowest price.
The computer automatically adds the quantity ordered to the inventory-in-transit files. The inventory-in-transit will be counted in the daily reorder calculation, until the goods arrive and are included in inventory. Mr. Cooper Teal calls the supplier to place a purchase order. Subsequently, he mails purchase order copies one and two to the supplier. Copy three of the purchase order is filed in numerical order; copy four goes to the warehouse, with quantities omitted, as authorization to receive goods; and copy five goes to Mr. Violet who places it in an unmatched purchase order file. The following table summarizes the distribution of purchase order copies:
PO Copy # Status
1 & 2 Mailed to the supplier
3 Filed in numerical order
4 Sent to the warehouse as authorization to receive goods
5 Sent to Mr. Violet who places it in an unmatched purchase order fileReceipt of Goods
All merchandise is purchased Free on Board (FOB) Marco’s railroad siding so MARCO does not pay the incoming freight costs nor take title to the inventory until it arrives at their railroad siding. When merchandise arrives, the appropriate purchase order is identified by reference to the accompanying shipping documents. Warehouse personnel count the shipment and inspect it for exterior evidence of damage (e.g., punctures in the cartons or crates). The warehouse only accepts clearly undamaged goods. The warehouse clerk enters quantities received on copy four of the purchase order and signs that copy to acknowledge receipt of the goods. Signed copies of purchase orders are then forwarded to Mr. Violet as receiving advices.
Vouching and Recording Payables for Merchandise
On receipt of signed receiving advices from the warehouse, Mr. Violet enters the quantities received into the perpetual inventory file via a PC. As a byproduct, the computer purges the purchase order from the inventory-in-transit file and produces a message indicating any difference between the quantity ordered and the quantity received. A copy of the purchase order is then attached to copy five in the numerical unmatched purchase order file. It is matched with the vendor’s invoice when the latter arrives.
When the receptionist opens the mail, she forwards any vendor invoices to Mr. Violet who matches them with the unmatched purchase orders and receiving advices. If a receiving advice is not on file for the invoice, he places it in an unmatched invoice file pending receipt of goods. Mr. Violet attempts to match the open purchase orders and unmatched invoices on a daily basis.When Mr. Violet matches an invoice with the corresponding receiving advice, he compares quantities and prices on the purchase order and receiving advice to the vendor’s invoice and tests the arithmetic accuracy of the invoice. Mr. Violet initials the invoice to indicate that this has been done and then keys the vendor, product quantity, price, date of receipt of goods, and discount information into an open voucher file on the computer. The terms are customarily 2/10 net 30. The information is automatically added to the voucher register file and a sequentially numbered voucher is printed to control subsequent disbursement and to serve as the control document for recording the liability and purchase.
The computer software summarizes the voucher register file monthly and posts the summary figures to the general ledger accounts. Other software produces a trial balance of the open voucher file any time, either by date due or by vendor. The vouchers (now with the vendor’s invoice, receiving advices, and copy five of the purchase orders attached) are held in a physical open voucher file in due-date order. The discount date is used unless otherwise ordered by Ms. Kim.
Non-merchandise Purchases and Services Received
The purchases of supplies and other goods are handled in exactly the same way as purchases of merchandise with two exceptions. First, Mr. Violet, using software that prints the purchase order and adds the information to the open purchase order file, originates purchase orders for such items as a new PC. Second, all such purchases not involving capital assets are posted to expense accounts directly. No inventory accounts are maintained for these items.When the receptionist opens the mail, invoices for services, such as utilities, are sent to Ms. Kim for approval. If she approves them, they become the equivalent of a purchase order and receiving advice. Ms. Kim stamps her approval, signs, and forwards them to Mr. Violet. Mr. Violet periodically (usually once a month) enters the data from such items, including appropriate payment date and terms, into the open voucher file. The invoices and/or statements are attached to the vouchers that are printed by the software program. These voucher packages are placed in the physical open voucher file and are treated the same as the vouchers for purchases of merchandise.
Cash Disbursements
Each morning, Ms. Kim, the Secretary-treasurer, reviews Marco’s short-term cash situation. This process is aided by software that summarizes the vouchers due on that day. Ms. Kim compares the summarized amount due on that day to the available ready cash and a float factor based on the average daily disbursements and the average number of days it takes for checks to clear the bank. If the cash less float exceeds the amount of vouchers due by at least the minimum cash balance set by Ms. Kim, she authorizes the payment of all vouchers due on that day. Ms. Kim then transfers the excess cash from Marco’s demand account to a money market account that earns interest. If the difference is less than the minimum cash balance set by Ms. Kim and there is cash available above the minimum balance required in the money market account, Ms. Kim authorizes payment of the vouchers due that day and transfers funds from the money market account to Marco’s demand account.
If sufficient funds are not available in the combined demand and money market accounts, Ms. Kim considers borrowing from the bank on the prearranged line of credit. If the line of credit is also inadequate, which is rare, Ms. Kim confers with Mr. Zen. Ms. Kim and Mr. Zen generally meet at least once a month to plan for intermediate and long-term financing needs.
After Ms. Kim authorizes the day’s payments, the approved voucher packages are forwarded to Ms. Amalia who compares the information to the supporting documents. If the voucher data are accurate, Ms. Amalia initials the face of the voucher and enters an authorization code via PC into the open voucher file. This triggers the printing of a pre-numbered check and detachable remittance advice based on the data in the open voucher file. The disbursement data are automatically transferred to the cash disbursements journal file and purged from the open voucher file. Ms. Amalia signs the checks and forwards them to Mr. Zen’s Secretary.
Mr. Zen’s secretary cancels the voucher document packages, presents the checks to Mr. Zen for counter signature, mails the checks to the vendors, and returns the documents to Mr. Violet for filing in voucher number order.
Bank Reconciliations
Upon receipt of the bank statements each month, Ms. Kim reconciles the beginning and ending balances and the receipts and disbursements to the book amounts. She forwards the reconciliations to Mr. Zen for review. He then returns them to Ms. Kim for filing.
Inventory and Cost of Goods SoldMarco maintains perpetual inventory records on each appliance. Each sale and purchase transaction is entered in the subsidiary ledgers for the particular item sold or purchased as described above. At the end of the month, a worksheet is prepared to cost the ending inventory on a FIFO. Mr. Violet uses a software package to accomplish the costing of ending inventory. The software is able to access both the perpetual inventory ledger and the voucher register file. At the end of the costing routine, the software produces the journal entry to recognize ending inventory and cost of goods sold for the month and enters the latter in the appropriate general ledger accounts.
III. Steps to Completion
(a) Internet and library research. Do an Internet and/or library search to determine the current state of the U.S. economy and the household appliance industry. This will be the bases for your summary of possible client audit and fraud risks that will be included in your report below. You need at least three sources of information for the U.S. economy and industry analysis; be sure to cite your sources in your report. You can use the most recent years for your internet search of the U.S. economy and industry – you do not have to go back to the years that are stated in the annual report for the project. In other words, the Marco financial statements are dated 2018 and 2019. You can complete your internet research on 2018 and 2019 and the project assuming that the financial statements are for the most current years – 2018 and 2019. When you analyze the financial statements in future Deliverables, assume that the years stated in the financial statements are for the most recent years; 2018 and 2019, if applicable.
(b) Client acceptance report.
Prepare a client acceptance report to the partner in charge of your engagement. Use your own words to prepare a report to the partner. There is no standard way to write a report and there is no template for a client acceptance report. Internal reports such as a client acceptance report are proprietary and confidential – information and data that would be included in a client acceptance report will vary depending on the audit firm and the client involved. Your report will need to contain lists of additional information the audit firm would need to gather before the client acceptance decision is finalized. You need to make up a name for the firm that you work for. Have fun making up a name – you can choose any name that you like that would be a good name for a firm that will be auditing your client.
The firm name should be in a letter head at the top of your client acceptance report. Address the report to the partner in charge of the audit, which you can assume is your instructor. This isn’t a standard audit report and you can format it as a memo to your supervisor that contains the required information and sections discussed below.
Page 97 starts of your Auditing textbook material discusses the client acceptance process. The client acceptance report is important because it aids in the process of evaluating whether or not to accept a client. The report would probably be written by an audit manager that will possibly be in charge of the potential audit to the partner in charge of the potential audit. There are a number of points that are on pages 97 through 100 that you should consider in your client acceptance report.
Your client acceptance report should contain the following sections:
A summary of possible client audit and fraud risks that you develop from your review of the publicly available information on the U.S. economy and the firm’s unaudited 2018 (as stated, you can use the most recent years such as 2018 and 2019) financial statements as well as the limited industrial data provided in the project. Use at least three sources of information; state your sources for the economy and industry analysis. Cite your sources in your client acceptance report.
A description of items you recommend the audit firm research concerning Marco’s managers that would address their ethical character and qualifications to run a firm like Marco along with a list of possible information sources. Include a short discussion of why you included each item by discussing how it would affect audit and fraud risk. Include three sources of information where you would expect to find this information. A source of information is somewhere you would look to develop this information and can be internal information within the firm, public source, or discussions with parties that might be familiar with Marco’s management. Cite your sources.
A description of items you recommend the audit firm research concerning Marco’s relationships with third parties to include customers, vendors, financial institutions the work with, and legal counsel that would be relevant to assess audit risk. Include possible sources of information for each – where you would expect to find the information. Include a short discussion of why you included each item by discussing how it would affect audit and fraud risk. Include three sources of information (cite your sources).
A description of items you recommend the audit firm review internally to determine the need for outside experts on the audit and whether the audit firm is sufficiently independent of Marco. Just provide a general discussion of the sources you would use here.The grading for the report has a style component.
(Hints: The text provides limited information on where to look for client acceptance information in its discussion of the process. However, the sources are similar to the ones it discusses in covering inherent risk assessment. The main difference between the two uses of the information is client confidentiality. Once you have accepted the client, you have much greater access to information. Before you have accepted the client, you will need the client’s permission to contact third parties or the third parties will risk legal liability for violating Marco’s confidentiality.Thus, your report should consider getting the client’s permission where necessary. In addition, client acceptance decisions involve different components of the risk model. When the risk of accepting this client, you need to be clear on which component is at risk. For example, audit risk issues involve risk to the auditor from such things as the risks of future litigation that don’t directly affect the risk of material misstatement. Inherent risks involve features of the firm and its environment that will increase the risk of material misstatement.) You probably will not be able to find sources detailing a client acceptance report; however, there are many sources of information about a client engagement letter – you can search the internet for the information and include the same type of information that you find for a client engagement letter in your client acceptance report.
(c) Draft engagement letter
Prepare a draft engagement letter for Marco.The firm name that you made up needs to be at the top of the engagement letter as a letterhead – use the same firm name that you used in (b). Fill in as much of the normal sections of the letter as possible given the information you have gathered. The engagement will only cover the financial statements and not any additional services. You can search the internet for sources of information that would be included in a client engagement letter. Include some of the information that you have included in your client acceptance report.
Page 100 of your Auditing textbook material discusses the engagement letter. The auditors prepare the engagement letter and sign it. They then present the engagement letter to the auditee for the auditee’s signature. Once signed, the engagement letter represents a contract between the two parties.
The engagement letter is important because it is the contract between the auditor and the auditee. You need to have a letterhead for your firm and address your engagement letter to your potential client. You need lines at the bottom of the engagement letter for partner signatures and client signatures. You need dates for the signatures. You can indicate the signatures and dates in a manner similar to the following:__________________________________
(Your law firm name)
By: _______________________________
(Your name)
__________________________________
(Client name) Date
__________________________________
(Client name) DateThere are a number of points that are on pages 97 through 100 that you should consider in your engagement letter.
1: Acceptance and Engagement Letters (optional)
(a and b) Your Client Acceptance Report – You report should be between two and three single-spaced pages using 1″ margins and 12-point font. You also don’t need to include more than three suggested sources for each section of the report. Name you file with your name and ” Marco Client,” and then attach it to the Marco 1 Assignment in LEO under Deliverable 1. The client acceptance report is a report written by an audit manager to an audit manager – these people would work for the same firm.(c) Your Draft Engagement Letter – Your engagement letter should be between one and two single-spaced pages using 1″ margins and 12-point font. Name your file with your name and ” Marco Engagement,” and attach it to the Marco 1 Assignment in LEO under Deliverable 1. An engagement letter is written by the partner of the audit firm to the potential audit client – these people work for two separate firms.
2: Inherent Risk and Materiality (optional)
Part a – Perform the following deliverables and document them in the Marco Risk and Material Memo Template Word document. You probably need to review the material in your text and online sources to understand internal controls and how they relate to inherent risk.Preliminary Inherent Risk Assessment – Review the description of Marco Appliances, Inc. and identify four entity-level inherent risks based on the information provided. I have listed one potential inherent risk area as an example, and you need to add four more to the list. Inherent risks can flow from client’s business risks, the nature of its governance structure, and its strategic plans. However, you need to be clear about how your risks create an increased risk of material misstatement in the financial statements and not just how they might create risks of lower operating or business performance for the firm.
Thus, for each inherent risk, describe the feature of the firm you believe affects inherent risk and explain how and why. By “how,” I mean whether it increases or decreases inherent risk. Make sure your “how” addresses a specific risk to the accuracy of the financial statements and whether audit effort should be increased or decreased for specific accounts or related groups of accounts if possible.
Limit your inherent risk analysis to the following sections of the project:
Description of Firm and Market Conditions
The Control Environment (only identify issues related to inherent risk)
Part b. covers risks identified using analytical procedures based on the financial data. You will be asked to identify transaction process risks associated with sales and purchases in another Deliverable.
1. Preliminary Analytical Procedures – Review Marco Appliance’s financial statements, ratios, and industrial data presented at the end of this document. Identify four accounts that you believe need additional audit scrutiny and explain why. I have included one example – and you will need to add four more to the list. Copies of Marco’s audited 2018 and unaudited 2019 financial statements are included after these requirements. Some common ratios for Marco and their industry are also included. You can search through your accounting material and online sources for ratios that would be used in analytical procedures.2. Preliminary Materiality Judgments- Set two preliminary materiality dollar amounts for the Marco audit – one for the balance sheet and one for the income statement. Document how you calculated your materiality amounts and explain why you chose the approach you did. There are many sources of materiality level judgments for audits in websites on the internet. You can select the approach that you like – remember that you need to explain the approach that would be best for Marco. Remember that the materiality level sets the level for transactions that an auditor will look at; below that level the auditor may not look at the transaction unless there is a high risk for that particular type of transaction.
Completed Marco Inherent Risk and Materiality Memo Template file containing the results of your inherent risk assessments, preliminary analytical review, and materiality level determination. The Marco Inherent Risk and Materiality Memo Template is in Course Resources. Rename you file with your name and ” Marco 2”, and then attach it to the Marco 2 Assignment in LEO under Deliverable 2.
Marco Appliances, Inc.
Balance Sheets
(Amounts in U.S. Dollars)Assets
Current Assets 2018 2019 2018 % of Assets 2019 % of Assets % Change
Cash and cash equivalents $ 22,045 $ 10,867 1.94 0.79 (50.71)
Money market funds 31,510 16,000 2.78 1.16 (49.22)
Accounts receivable 301,713 425,755 26.60 30.83 41.11
Allowance for doubtful accounts (31,916) (33,779) (2.81) (2.45) (5.84)
Inventory 307,701 503,091 27.13 36.43 63.50
Total Current Assets 631,053 921,934 55.65 66.76 46.09Property and Equipment
Plant $ 625,000 $ 625,000 $ 55.11 $ 45.26
Accumulated depreciation – plant (220,000) (240,000) (19.40) (17.38) (9.09)
Equipment 120,000 120,000 10.58 8.69
Accumulated depreciation – equipment (72,000) (96,000) (6.35) (6.95) (33.33)
Land 50,000 50,000 4.41 3.62 –
Net Property and Equipment 503,000 459,000 44.35 33.24 (8.75)
Total Assets $ 1,134,053 $ 1,380,934 100 100 21.77Liabilities and Stockholders’ Equity
Current Liabilities
Accounts payable 145,031 387,757 12.79 28.08 167.36
Payroll taxes payable 8,524 17,436 0.75 1.26 104.55
Income taxes payable 30,235 4,125 2.67 0.30 (86.36)
Dividends payable 14,197 3,203 1.25 0.23 (77.44)
Total Current Liabilities 197,987 412,521 17.46 29.87 108.36Notes payable 215,000 185,000 18.96 13.40 (13.95)
Total Long-term Liabilities 215,000 185,000 18.96 13.40 (13.95)Stockholders’ Equity
Capital stock 300,000 300,000 26.45 21.72
Paid-in capital 100,000 100,000 8.82 7.24
Retained earnings 321,066 383,413 28.31 27.76 19.42
Total Stockholders’ Equity 721,066 783,413 63.58 56.73 8.65
Total Liabilities and Equity $ 1,134,053 $ 1,380,934 100 100 21.77Marco Appliances, Inc.
Income Statements
(Amounts in U.S. Dollars)2018 2019 2018 2019 % Change
Sales $ 2,756,561 $ 3,307,873 100.00 100.00 20.00
Sales discounts (8,371) (9,207) (0.30) (0.28) (9.99)
Sales returns (33,809) (51,559) (1.23) (1.56) (52.50)
Bad debt expenses (27,565) (33,078) (1.00) (1.00) (20.00)
Net Sales 2,686,816 3,214,029 97.47 97.16 19.62Cost of goods sold 2,159,042 2,601,646 78.32 78.65 20.50
Gross margin 527,774 612,383 19.15 18.51 16.03Salaries expense $ 259,287 $ 290,400 9.41 8.78 12.00
Payroll tax expense 18,434 21,199 0.67 0.64 15.00
Fringe benefits 14,357 16,081 0.52 0.49 12.01
Rent 6,491 7,140 0.24 0.22 10.00
Utilities 21,943 25,673 0.80 0.78 17.00
Insurance 6,149 6,456 0.22 0.20 4.99
Supplies expense 3,067 3,650 0.11 0.11 19.01
Postage expense 974 1,140 0.04 0.03 17.04
Advertising expense 4,636 5,100 0.17 0.15 10.01
Professional fees 11,386 11,500 0.41 0.35 1.00
Miscellaneous 980 1,225 0.04 0.04 25.00
Purchase discounts lost 42,374 53,815 1.54 1.63 27.00
Interest expense 9,215 12,164 0.33 0.37 32.00
Depreciation expense 44,000 44,000 1.60 1.33 –
Total operating expenses 443,293 499,543 16.08 15.10 12.69
Operating Income 84,481 112,840 3.06 3.41 33.57Interest revenue 22,864 28,580 0.83 0.86 25.00
Income before income taxes 107,345 141,420 3.89 4.28 31.74Income taxes 25,114 37,508 0.91 1.13 49.35
Net Income $ 82,231 $ 103,912 2.98 3.14 26.37Beginning retained earnings $ 271,728 $ 321,067
Net income 82,231 103,912
Dividends (32,892) (41,565)
Ending retained earnings $ 321,067 $ 383,414Marco Appliances, Inc.
Financial Ratios
(Amounts in U.S. Dollars)2018 2019
Operating Performance
Overall Performance
Return on Assets 7.3% 7.5%
Return on Equity 11.4% 13.3%
Asset Turnover 2.4 2.4Cash Conversion Cycle
Days cash in receivables 40.0 47.0
Days cash in inventories 52.0 70.6
Days needs 92.0 117.6
Days cash in payables and accrued liabilities 23.0 50.8
Net conversion cycle 69.0 66.8Financial Position
Short-term
Current Ratio 3.19 2.23
Quick Ratio 1.79 1.10
Dividend payout 92.6%Long-term
Total debt to equity 0.57 0.76
Long-term debt to equity 0.30 0.24Effective Tax Rate 23.4% 26.5%
Wholesale Heating and AC Industry
Comparative Balance Sheet Percentages12/31/2018 12/31/2019
% of Assets % of Assets
Cash and Equivalents 5.00 4.50
Accounts Receivable (net) 35.00 37.00
Inventory 40.00 39.00
Other Current Assets 1.50 1.40
Total Current Assets 81.50 81.90Fixed Assets (net) 17.50 17.00
Intangible Assets (net) 1.00 1.10
Other Non-Current Assets 18.50 18.10
Total Assets 100.00 100.00
Liabilities
Accounts Payable 28.50 30.50
Short-term Loan Payables 13.50 14.00
Income Taxes Payable 2.00 2.20
Other Current Liabilities 1.40 1.30
Total Current Liabilities 45.40 48.00
Long-term Debt 8.90 8.50
Net Worth 45.70 43.50
Total Liabilities and Net Worth 100.00 100.00Comparative Income Statement Percentages
Net Sales 100.00 100.00
Cost of Goods Sold 79.00 79.50
Gross Margin 21.00 20.50Total Expenses 16.50 17.00
Income before Taxes 4.50 3.50Asset Turnover 2.60 2.55
Return on Assets 6.20% 5.90%
Current Ratio 1.80 1.71
Quick Ratio 0.88 0.86
Total Debt to Equity 1.19 1.30
Long-term Debt to Equity 0.19 0.20Final Submission:
Review the Marco project to evaluate their control environment strengths and weaknesses. For each strength, provide a short description of the activity or feature you believe is a strength and then explain how it strengthens their control environment. For each weakness, provide a description of the activity or feature that you believe is a control environment weakness, an explanation of how it weakens the control environment, and a recommended improvement. Limit your answer to three major strengths and three major weaknesses. I have provided one example of each in the template file and you need to add three more strengths and three more weaknesses to the table in the template file.Review their specific controls over sales and collections (i.e., based on the Sales and Collection Processing section of the project) and purchases and payments (i.e., based on the Purchasing and Payments Processing section of the project) to evaluate transaction control weakness.
Describe the control weakness (just a short statement of weakness);Describe how the weakness could create a material error in the financial statements including which general ledger accounts and audit objective might be affected (be clear on which category is involved, balance, transaction, or presentation and disclosure) and provide an explanation of how the weakness might lead to a violation of the audit objective;
Make a recommendation on how their controls could be improved to mitigate this weakness; and
Discuss some potential weaknesses in the control you suggest (e.g., how it might be overridden).
Limit your answers to the four most serious weaknesses you find in the sales and collection processes and the four most serious weaknesses you find in the purchases and payments processes. The template file has separate sections for each step in these processes to help you structure your answer. The four weaknesses in each of the processes can be spread in any way across the steps and you are not required to have any minimum number in any step.Your control weaknesses and recommendations need to be specific to the project and sensitive to the size of the organization. The following are some examples of recommendations that would not be appropriate for Marco:
They are too small and cannot afford to establish and internal audit department nor contract out those services to an outside auditor.
They cannot afford to make significant changes to their current computer systems and so recommendations to computerize their current manual operations are not practical. However, all their information is currently stored electronically and so you may suggest simple ways they could more effectively share or control that data.
The operations of their EDP environment are not completely described in the project. Thus, your critique of their controls should be limited to those portions of their EDP environment that are included in the project description.
Document your findings in the Marco Controls Template file. The Marco Controls Template is in Course Resources. Rename your file with your name and ” Marco Final Submission,” before attaching it to the Project 2 Assignment folder in LEO
IV. DeliverablesFinal version of your project. Include all files used throughout the project.
Guidance to enhance your final deliverables:
As your professor, I eagerly look forward to reading your deliverables and or viewing your presentation or video. Please note that I have very little interest in reading what others in the field have written. It is fine to quote sources to illustrate or support your own thoughts, however, every graded assessment in graduate accounting courses will be based on the content you have thought about and you have written in your own words. To properly guide you, I need to read your thoughts and interpretations, and observe you making presentations, which demonstrate your comprehension of the learning goals and ability to perform the competencies.
Check your deliverables for plagiarism using a free online tool, such as Grammarly, Papers Owl, Citation Machine, or others. Your professor will use TurnItIn.com to check all graded assessments.
Read the grading rubric before submitting your final project to ensure you have met all of the requirements of this project. Consider incorporating feedback you received from family and friends you asked to read your deliverables and/or watch your presentation.
Submit your draft documents to the Graduate Writing Center at least 1 week before the project due date. This free resource can be accessed in your LEO classroom. Make edits to your deliverables after reviewing feedback from the writing center tutors.
If relevant, review the Departmental Late Policy, which is in syllabus. Note: no assignments are accepted after the last day of class.
Submit all required files on or before the due date.V. Rubric:
You will find the rubric in LEO under Contents>Course Resources>Projects & Rubrics/Project 2 Rubric.
RUBRIC
QUALITY OF RESPONSE NO RESPONSE POOR / UNSATISFACTORY SATISFACTORY GOOD EXCELLENT Content (worth a maximum of 50% of the total points) Zero points: Student failed to submit the final paper. 20 points out of 50: The essay illustrates poor understanding of the relevant material by failing to address or incorrectly addressing the relevant content; failing to identify or inaccurately explaining/defining key concepts/ideas; ignoring or incorrectly explaining key points/claims and the reasoning behind them; and/or incorrectly or inappropriately using terminology; and elements of the response are lacking. 30 points out of 50: The essay illustrates a rudimentary understanding of the relevant material by mentioning but not full explaining the relevant content; identifying some of the key concepts/ideas though failing to fully or accurately explain many of them; using terminology, though sometimes inaccurately or inappropriately; and/or incorporating some key claims/points but failing to explain the reasoning behind them or doing so inaccurately. Elements of the required response may also be lacking. 40 points out of 50: The essay illustrates solid understanding of the relevant material by correctly addressing most of the relevant content; identifying and explaining most of the key concepts/ideas; using correct terminology; explaining the reasoning behind most of the key points/claims; and/or where necessary or useful, substantiating some points with accurate examples. The answer is complete. 50 points: The essay illustrates exemplary understanding of the relevant material by thoroughly and correctly addressing the relevant content; identifying and explaining all of the key concepts/ideas; using correct terminology explaining the reasoning behind key points/claims and substantiating, as necessary/useful, points with several accurate and illuminating examples. No aspects of the required answer are missing. Use of Sources (worth a maximum of 20% of the total points). Zero points: Student failed to include citations and/or references. Or the student failed to submit a final paper. 5 out 20 points: Sources are seldom cited to support statements and/or format of citations are not recognizable as APA 6th Edition format. There are major errors in the formation of the references and citations. And/or there is a major reliance on highly questionable. The Student fails to provide an adequate synthesis of research collected for the paper. 10 out 20 points: References to scholarly sources are occasionally given; many statements seem unsubstantiated. Frequent errors in APA 6th Edition format, leaving the reader confused about the source of the information. There are significant errors of the formation in the references and citations. And/or there is a significant use of highly questionable sources. 15 out 20 points: Credible Scholarly sources are used effectively support claims and are, for the most part, clear and fairly represented. APA 6th Edition is used with only a few minor errors. There are minor errors in reference and/or citations. And/or there is some use of questionable sources. 20 points: Credible scholarly sources are used to give compelling evidence to support claims and are clearly and fairly represented. APA 6th Edition format is used accurately and consistently. The student uses above the maximum required references in the development of the assignment. Grammar (worth maximum of 20% of total points) Zero points: Student failed to submit the final paper. 5 points out of 20: The paper does not communicate ideas/points clearly due to inappropriate use of terminology and vague language; thoughts and sentences are disjointed or incomprehensible; organization lacking; and/or numerous grammatical, spelling/punctuation errors 10 points out 20: The paper is often unclear and difficult to follow due to some inappropriate terminology and/or vague language; ideas may be fragmented, wandering and/or repetitive; poor organization; and/or some grammatical, spelling, punctuation errors 15 points out of 20: The paper is mostly clear as a result of appropriate use of terminology and minimal vagueness; no tangents and no repetition; fairly good organization; almost perfect grammar, spelling, punctuation, and word usage. 20 points: The paper is clear, concise, and a pleasure to read as a result of appropriate and precise use of terminology; total coherence of thoughts and presentation and logical organization; and the essay is error free. Structure of the Paper (worth 10% of total points) Zero points: Student failed to submit the final paper. 3 points out of 10: Student needs to develop better formatting skills. The paper omits significant structural elements required for and APA 6th edition paper. Formatting of the paper has major flaws. The paper does not conform to APA 6th edition requirements whatsoever. 5 points out of 10: Appearance of final paper demonstrates the student’s limited ability to format the paper. There are significant errors in formatting and/or the total omission of major components of an APA 6th edition paper. They can include the omission of the cover page, abstract, and page numbers. Additionally the page has major formatting issues with spacing or paragraph formation. Font size might not conform to size requirements. The student also significantly writes too large or too short of and paper 7 points out of 10: Research paper presents an above-average use of formatting skills. The paper has slight errors within the paper. This can include small errors or omissions with the cover page, abstract, page number, and headers. There could be also slight formatting issues with the document spacing or the font Additionally the paper might slightly exceed or undershoot the specific number of required written pages for the assignment. 10 points: Student provides a high-caliber, formatted paper. This includes an APA 6th edition cover page, abstract, page number, headers and is double spaced in 12’ Times Roman Font. Additionally, the paper conforms to the specific number of required written pages and neither goes over or under the specified length of the paper. GET THIS PROJECT NOW BY CLICKING ON THIS LINK TO PLACE THE ORDER
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