Draft TOC for Brony’s Bikes
Strategy: by module, main activities, main AU-C sections, Exhibits?
Module I:Assessment of inherent risk
Authoritative standards referred to
AU-C 315 Understanding the Entity and its Environment and Assessing the Risk of Material Misstatement
AU-C 520 Analytical Procedures
Description of the Company and Its Operations
Product Lines
Scope of Operations and Locations
Distribution Network
Company History
Audit Engagement and Team
Key Brony’s Bikes Personnel
Brony’s Bikes Board of Directors and Audit Committee
Brony’s Bikes Accounting and Information Systems
Assessment of Inherent Risk
Brony’s Bikes Organization Chart
Internal Control Concerns
Capital Structure and Financing Issues
Litigation
External Auditor’s Use of Work of Internal Audit
Industry Comparative Ratios
Working Papers:
WP A.1- Comparative income statements
WP A.2 - Sales and cost of goods sold—by product line
WP A.3 - Comparative schedule of manufacturing overhead and operating expenses
WP A.4 - Inventories
WP A.5 - Budget vs Actual Income Statements (prepared by client - no calculations required)
WP A.6 - Comparative Common Sized Balance Sheets
WP A.7 - Wheels 4U Financial Statements 20X8 and 29X9 (These financial statements were obtained from Wheels’ website - no calculations required).
Exhibits:
Exhibit BB.1 Brony’s Bikes, Inc., Comparative Income Statements, 20X0–20X9 (in thousands of dollars)
Exhibit BB.2Brony’s Bikes, Inc., Adjusted Trial Balance as of December 31, 20X9
Exhibit BB.3 Brony’s Bikes, Inc., Income Statements for the Years Ended December 31, 20X9 and 20X8 (in thousands of dollars)
Exhibit BB.4Brony’s Bikes, Inc., Balance Sheets as of December 31, 20X9 and 20X8 (in thousands of dollars)
Exhibit BB.5Brony’s Bikes, Inc., Statement of Retained Earnings for the Years Ended December 31, 20X9 and 20X8
Exhibit BB.6Brony’s Bikes, Inc., Statement of Cash Flows for the Year Ended December 31, 20X9 unaudited
Exhibit BB 7 Brony's Bikes, Sales Processing Flow Chart
Exhibit BB.8Brony's Bikes, Processing Flowchart—Cash Receipts from Customers
Exhibit BB.9 Brony's Bikes Purchases and Accounts Payable Flowchart
Exhibit BB.10Brony's Bikes, Payment Processing Flowchart
Exhibit BB.11 Brony's Bikes, Processing Payroll Processing Flowchart
Exhibit BB 12 Brony’s Bikes, Selected Client Adjusting Entries, December 31, 20X9
Exhibit BB 13 Brony’s Bikes, Vouchers Register partial, December 31, 20X9
Exhibit BB 14 Brony's Bikes, Sales Summary, December 31, 20X9
Exhibit BB 15 Brony’s Bikes, Cash Summary, December 31, 20X9
Exhibit BB 16 Brony's Bikes, Check Register partial, December 31, 20X9
Procedures:
Prepare a complete organization chart for Brony’s Bikes
Prepare a common-sized income statement
Prepare a common-sized cost per unit calculation as a percentage of sales price
Prepare a common-sized components calculations as a percentage of sales
Calculate finished goods inventory turnover
Calculate materials and purchased parts turnover
Compare budget to actual income statement amounts for variances of interest to the auditor
Complete a common sized balance sheet
Calculate current ratio, quick ratio, times interest earned, and return on stockholders’ equity
Compare current ratio, quick ratio, times interest earned, and return on stockholders’ equity with industry averages
Compare common sized financial statements and related ratios with peer company, Wheels 4U
Identify strengths and weaknesses of Brony's Bikes with peer company, Wheels 4U
Based on your analytical procedures performed identify concerns that inspire further testing. Relate your concerns to management’s assertions contained in the financial statements (existence or occurrence, completeness, valuation or allocation, rights and obligations, and presentation and disclosure.)
Identify any specific transaction areas for which you are you willing to reduce inherent risk below 100%
Module II:Assessment of control risk
Authoritative standards referred to
AU-C200 Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance With Generally Accepted Auditing Standards
Committee of Sponsoring Organizations (COSO)Executive Summary
Description of the Accounting Information System and Internal Control over Financial Reporting
Computerized Ledger
Sales Processing
Cash Receipts from Customers
Purchases and Accounts Payable Processing
Payment Processing
Production Payroll Processing
Other Accounting System Features
Procedures
Identify and assess weaknesses in the internal control over financial reporting by reference to specific assertions
Develop a list of questions that you would want to ask management so that you could gain enough information to make those assessments
Identify any specific transaction areas are you willing to assess control risk less than high (100%)
Module III:Control testing the sales processing subset of the revenue cycle
Working Papers:
WP C Sampling Plan
Other matters
Risk of Overreliance
Tolerable Failure (Deviation) Rate
Misstatements Detected
Revenue Cycle
Procedures
Based on the deficiencies in the design of controls identified in the sales processing subset of the revenue cycle as explained in the first two paragraphs of this module, assess whether or not the sampling and testing plan address all relevant financial statement assertions related to sales and accounts receivable
Complete the attribute sampling plan worksheet
Assess the impact on further testing as a result of the identified misstatements in the revenue cycle
Assess whether or not the aggregate materiality threshold be changed for any part of the revenue cycle
Module IV: PPS sampling—factory equipment additions
Monetary Unit Sampling (MUS)
Stratifying the Sample
Define the Population
Basic precision
Incremental allowance for sampling error
Upper misstatement limit
Excel file 20X9 MUS
WP 11.3A—Monetary unit sampling plan;
WP 11.3B—Monetary unit sampling plan—projected misstatement; and
WP 11.3C—Monetary unit sampling plan—computed precision and upper misstatement limit.
Risk of incorrect acceptance
Procedures
Determine the objective of performing the test of factory equipment expenditures, the relevant population, and the sampling unit
Calculate the sampling interval
Evaluate the risk of incorrect acceptance, expected population deviation rate, and the tolerable rate of deviation
Assess the tainting percentage
Schedule out the projected misstatements
Evaluate the sampling results and recommend any further work you deem to be necessary based on those results
Module V:Accounts receivable aging analysis and adequacy of allowance for doubtful accounts
Excel file 20X9 AR
WP 3—Accounts and notes receivable—trade
WP 3.A—Accounts receivable aging analysis
WP 3.C—Allowance for uncollectible accounts
Other matters
Audit Confirmations
Reclassification Entry
Quality of Audit Evidence
Procedures
Evaluate sampling results for receivables
Determine whether further procedures are required as the result of positive confirmations not returned
Evaluate whether or not subsequent collections of receivable should be tested
Examine evidence supporting or not supporting the write-off of receivables amounts
Assess the sufficiency of the allowance for doubtful accounts
Module VI:Sales and purchases cutoff tests
Authoritative standards
AU-C 501 Audit Evidence—Specific Considerations for Selected Items
Other matters
Cutoff Test
Voucher Register
Sales Summary
Inventory Observation
Excel file20X9 Cutoff
Audit Adjustments
Intentional versus Unintentional Misstatements
WP 6.4 Inventory Cutoff
Procedures
Compare cutoff results with the voucher register and sales summary
Draft any audit adjustments suggested by the cutoff analysis performed
Module VII:Search for unrecorded liabilities
Excel file20X9 Liab
WP 15.1
Other matters
Unrecorded Liabilities
Procedures
Assess the adequacy of the procedures performed on unrecorded liabilities
Assess the materiality of unrecorded liabilities detected
Module VIII:Dallas Dollar Bank—bank reconciliation
Excel file20X9 Bank
WP 1.A - Cash on hand and in banks
WP 1.B - Bank reconciliation—Dallas Dollar Bank
WP 1.C - Inter-bank transfer schedule
Other matters
Bank Reconciliation
Deposit in transit
Bank Cutoff Statement
Outstanding Checks
Procedures
Determine whether the Dallas Dollar Bank reconciles to WP 1.B
Assess the cause of any non reconciling items
Draft the necessary audit adjustment in response to a check that was recorded in an incorrect amount
Inspect the bank cutoff statement for items relevant to December 31 balances
Assess whether there are bank transfer issues
Module IX:Analysis of inter-bank transfers
WP 1.C - Inter-bank transfer schedule
Other matters
Inter-bank Transfer Schedule
Procedures
Examine evidence related to the $3 million loan to officer (Lawton)
Assess whether or not the loan was repaid as of December 31 as reported
Draft any required reclassification entry
Examine the covenants for any loans from either Brony’s Bikes bank determine whether any covenants were or are in violation resulting is possible default
Recommend any additional audit procedures you think are necessary as relates to the status of the loan to officer Lawton
Module X:Analysis of marketable securities
Excel file20X9 Security
WP 2
Other matters
Marketable Securities
Loss on Decline of Market Value of Securities
Allowance for Decline of Market Value of Securities
Procedures
Assess the consistency of Brony’s Bikes security investment objective with its present portfolio composition
Determine whether the securities with this portfolio are correctly classified as current or non current
Examine WP 2 and compare the composition of the securities portfolio with Brony’s Bikes stated objectives
Draft appropriate language in WP 2 legend explaining how market values have been determined
Draft proposed adjustment for correction of fair values
Draft proposed adjustment for correction of interest revenue
Module XI:Plant asset additions and disposals
Excel file20X9 Plant
Excel files 20X9 MUS
WP 11—Plant assets and accumulated depreciation
WP 11.4 - Factory equipment - additions and disposals
Other matters
Additions and Disposals
Salvage Value
Half-year Depreciation (convention)
Procedures
Post required audit adjustment (s) from WP 11 to the appropriate lead schedule
Examine the underlying documentation referred to in the explanation of audit legends E and W
Assess the relevance and reliability of the underlying documentation for WP 11
Evaluate the misstatement of gain on disposal and propose an appropriate audit adjustment
Propose an appropriate audit adjustment in response to the incorrect depreciation entry arising from the misstatement of gain on disposal
Assess whether the half year depreciation convention has been appropriately applied
Assess whether the depreciation misstatement is carried over to next year’s overhead allocation and propose correction of this misstatement does affect next year’s overhead allocation
Post audit adjustments #10 and 11 in WP 11
Module XII:Estimated liability for product warranty
Excel file20X9 Warranty
WP 20
Other matters
Estimated Liability for Product Warranty
Procedures
Examine the WP 20 carefully and comment on its adequacy and completeness
Draft any appropriate adjusting entry in response to your examination of the estimated liability for product warranty
Determine whether your examination would indicate a retrospective adjustment through retained earnings or a prospective adjustment through current and future statements of income
Module XIII:Mortgage note payable and note payable to Bank Two
Excel file20X9 Notes
WP 14 - Notes payable and accrued interest - lead schedule; and
WP 14.3 - Notes payable—long-term
Other matters
Mortgage Note Payable
Procedures
Determine the audit objectives in the examination of WP 14.3 long-term notes payable
Determine the most relevant assertions to be tested in WP 14.3
Based on WP 14.3 determine whether the relevant assertions have been appropriately tested
Determine whether WP 14.3 documentation satisfies the stated audit objectives for long-term notes payable
Record Reclassification Journal Entry C for the current portion of both notes
Determine the nature of the adjustment to “notes payable - trade” and to “interest payable” appearing in the adjustments column of the lead schedule
Module XIV: Working trial balance
Authoritative standards
AU-C 500 Audit Evidence
AU-C 520 Analytical ProceduresWorking Trial Balance
Excel file 20X9AJE sol
Excel file20X9 WTB
Excel file 20X9 AUDBS
WP A.5 Budgeted Versus Actual Income Statements
Other matters
Substantive Audit Testing
Auditor’s Opinion
Disclaimer
Materiality
Understatements and Overstatements
Ratios
Budgeted Balances
Audited Balances
Variances
Evaluating Audit Evidence
Procedures
Perform the review phase analytical procedures
Compare the two materiality thresholds provided with the proposed audit adjustments
Determine whether either or both of the materiality thresholds have been exceed
Draft language for the appropriate WP that clearly states the impact on the auditor’s report if Brony’s Bikes does not agree to make the proposed audit adjustments, either in total or in part
Calculate the percentages of individual balance sheet items and components relative to totals for 20X9
Calculate the new ratios for 20X9 based on the audited financial statements
Prepare a comment to WTB stating the purpose of applying analytical procedures in the evaluation and review phase of the audit
Prepare a comment to WTB stating the audit significance if the auditor fails to develop independent expectations as part of performing final analytical procedures
Compare audited balance sheets together with the related ratios with the balance sheets and ratios that you developed in Module I and document the conclusions can you draw regarding the comparison
Copy WP A.5 into the new file substituting the audited amounts for unaudited amounts but retaining the budgeted amounts
Determine whether unexpected changes have occurred in the WP A.5 comparison
Module XV:Audit report
Authoritative standards
AU-C 260 The Auditor’s Communication With Those Charged With Governance
AU-C 265 Communicating Internal Control Related Matters Identified in an Audit
AU-C 501 Audit Evidence—Specific Considerations for Selected Items (litigation)
AU-C 570 The Auditor’s Consideration of an Entity’s Ability to Continue as a Going Concern
AU-C 580 Written Representations
AU-C 700 Forming an Opinion and Reporting on Financial Statements
AU-C 705 Modifications to the Opinion in the Independent Auditor’s Report
AU-C 706 Emphasis-of-Matter Paragraphs and Other-Matter Paragraphs in the Independent Auditor’s Report
Other matters
Audit Report
Footnote Disclosures
Representation Letter
Significant Deficiencies
Internal Control Deficiencies
Legal Action
Liquidity Problems
Loan Default
Substantial Doubt as to Continued Existence (Going Concern)
Procedures
Review the narrative included in Module XV and document any matters discussed with management or revealed in the various written representations for which you feel that further audit work is necessary before deciding on the final language of the auditor’s report
Prepare any comments you have on the appropriateness of the proposed auditor’s report