Case Study: Audit Processes of a Computer Company

Case Study: Audit Processes of a Computer Company Introduction Internal auditing is a consulting activity on a company that is independent. It aims at helping a company/ form evaluate its managerial system, identify issues in the firm and control the process of governance. Therefore an internal audit helps in supporting the board in their duties of completing important businesses in the company. The main issues faced by the auditor is whether research and development costs expensed in establishing technological feasibility were properly expensed or capitalized when appropriate. A good audit plan when implemented improves business performances and increases sales in a company. Definitions An internal audit is a tool used in firms to evaluate how effective its management system is and its quality. An internal auditor is any person who is qualified enough to have a responsibility of performing the audit process Nonconformance is the situation where the practice of a company is in disagreement with the standard practices KCN Analysis of the Audit Strategies Section Purpose Audit Strategy OBJECTIVES OF THE ENGAGEMENT This lists the services to be provided by the audit firm to KCN. The aim of this process is to define Keyton Computers Networks Inks internal audit for the purpose of evaluating the companys effectiveness.This is the audit of KCNs financial statements for the year ended December 31, 2015, and the issuance of a letter of engagement. BUSINESS AND INDUSTRY CONDITIONS To evaluate KCNs business and the industry it operates in KCN sells and services micro-computers, networking hardware and software to different businesses. PLANNING MEETINGS Shows the meetings that have been made with the clients and CPA team One meeting so far held with client and one with engagement team OWNERSHIP AND MANAGEMENT Shows/ indicates who owns and manages the company. Owners: Terry Keystone, Mark Keystone, John Keystone, Keith Young, and Rita Young. Managers: Terry and Mark Keystone OBJECTIVES, STRATEGIES AND BUSINESS RISKS This establishes clients goals, how they planned to achieve it, and the commensurate risks, and how they planned to overcome these risks. The main aim is to increase revenues 110% and increase net income to112% for each of the next 3 years.   To achieve this there will be need to: (1) advertise aggressively, sell to customers with higher risk profiles, and to develop new software.    The primary risks involved are not being able to produce the desired results and exceeding increased sales with credit losses. Another possible risk is not producing products in the software development. MEASUREMENT AND REVIEW OF FINANCIAL PERFORMANCE These are the ways used for performance evaluation. The procedures include inventory and receivables turnover, aging of accounts receivable, and the total inventory balance. PROCEDURES TO ATTAIN AN UNDERSTANDING OF CLIENT AND CLIENTS OPERATING ENVIRONMENT This tells the procedures to be done so the auditors can understand the client and the clients environment. For this audit strategy, the auditor needs to 1) review the prior years audit, 2) make inquiries from management, 3) analyze KCNs minutes of its board of directors meetings, 4) evaluate performance reports, 5) analyze company website, 6) appraise industry reports, and 7) assess business newspapers including the Wall Street Journal. AUDIT APPROACH This defines the general plan to be taken. Just like last years audit, the accountants assigned to KCNs audit have to make a plan about the companys tests of controls to gauge whether its control risks are below the maximum for the identified assertions. SIGNIFICANT RISKS Primary risks identified by the auditors. The primary risks involved are not being able to produce the desired results and exceeding increased sales with credit losses. Another possible risk is not producing products in the software development, and analysis of the quarterly results showed significant bonuses awarded to officers. SIGNIFICANT ACCOUNTING AND AUDITING MATTERS This are matters of concern in accounting and auditing Two primary concerns exist: whether accounting for extended warranties is done properly and cost of software. PLANNING MATERIALITY The auditor computes the materiality threshold. Review of sales, total assets, and pretax net income, to plan for materiality, $70,000 was established as the measure. SCHEDULING AND STAFFING PLAN This is the audits schedule. It also identifies the human resources assigned to the engagement. This includes the target dates for each major section of the audit starting from the interim audit work up to the updating of the management letter.The firm budgeted 118 hours for the engagement. KCN Risks RiskImplications and Response The primary risks involved are not being able to produce the desired results and exceeding increased sales with credit lossesthrough the extension of credits to high risk customers This increases the risk of bad debt expense misstatement and the corresponding allowance. The auditors can revise their estimates on the value of an account, and ignore the procedures previously done. Bonuses for the clients officers There could be an increase in the risk of quarterly results misstatement to extract the maximum bonus for officers.Also this motivates the officers to work more for more bonuses. The auditors may respond by reducing the number of the staff as long as they can handle their duties, to reduce number of people receiving bonuses. KCN Capitalization of Software Development Costs For KCN, the auditor has to determine whether research and development costs including those expended to establish technological feasibility have been properly booked as expenses or capitalized wherever appropriate.The audit firm will then identify the point of feasibility for the software product.The primary risks involved are not being able to produce the desired results and exceeding increased sales with credit losses by selling to high risk customers. The implication of this factor is that it creates a chance for misstatement of bad debt expense and the allowance for bad debts. Moreover, auditors will either increase or decrease their evaluation of the worthiness of the accounts receivable and avoid relying on previously done procedures. KCN Ratio Analysis Keystone Computers Networks, Inc. Analytical Review of Financial Ratios For the Period Ended December 31, 20X5 Details of Computations of 2005 ratios Ratio analysis may be difficult when there are no major changes in ratios.   However, the following might be considered: Number of Sales in Accounts per day Changes in credit policy and customer mix Improved economic conditions Exaggerations of sales Understatement of purchases Turnover of Inventory Change in the policy of the inventory exaggeration of inventory Understatement of the commodities bought by the company As KCN competes with companies that are much larger than itself and some even older in the computer and software business, the economic pressure is a lot. Whether bor not the company succeeds depends on how it handles the competition, for example, being able to attain and maintain a qualified market. This may increase its growth in the software sector by up to 6%. Conclusion The audit process is an important part of a company. Using the ratios and factors above, the Keyton company auditing process was carried out.   The increased profitability level resulted to a number of ratios with significant changes.As mentioned in the first part of this discussion paper, the auditor needs to determine whether research and development costs are properly expenses or capitalized when appropriate. The auditors determined that accounting for research and development was followed and all it needs to do is to identify when the software product became technologically feasible. As stated above, implementing these policies from the auditors reports will increase the sales for example, up to 6% in software alone. This supports our thesis statement. References Chesler, L. (1981). Baseline audit plan. Santa Monica, Calif. Kagermann, H. (2008). Internal audit handbook: Management with the SAP-Audit Roadmap. Berlin: Springer. Pickett, K. H. S. (2006). Audit planning: A risk-based approach. Hoboken, N.J: Wiley. Why did the Compromise Fall in 1860? Why did the Compromise Fall in 1860? During the beginning of the nineteenth century, the relationship between North and South deteriorated over the issue of territorial expansion. In 1850, the issue of slavery was slowly dividing the North and South sections of the United States; both factions were of similar origins and had a myriad of common bonds. Frantic efforts at compromise were launched such as the Kansas-Nebraska Act of 1854 and The Missouri Compromise of 1820. However, the sectional rift only increased with the Brooks-Sumner incident and any chances of compromise were terminated with the Supreme Court decision of the Dred Scott case in 1859. The two powerful parties of the Second American Party System, the Democrats and the Whigs, were dumbfounded and could not find a solution to the slave question, which ultimately lead to their destruction. From their remains rose two new political parties, the Republican Party and a southern party devoted to the defense of slavery. Their battle in the election of 1860 would decide the future and fate of the United States. By 1860 all attempts at compromise had failed, and within a year the nation was in the midst of a bloody Civil War that would cost over 600,000 American lives and divided many families in the process. The types of economies that developed in the three regions of the United States in the first half of the nineteenth century had a powerful impact on political goals and decisions. The South grew important cash crops such as cotton, tobacco, sugar, and rice. The North was far more industrialized than the South or even the West, having shifted from mercantile capitalism. At the same time the West shifted from subsistence farming to commercial agriculture and produced more foodstuffs, such as corn and wheat, than the other two regions. The North came to rely more and more on western foodstuffs and in return, westerners became consumers of northern industrial and commercial products. By the 1850s the North and West were economically joined, and the Norths economy was rapidly evolving into a modern-day industrial and commercial system. In the South, cash crops such as rice and tobacco were grown extensively. Yet no commodity was more important to the South than cotton. One southern politi cal leader was so certain that the rest of the nation depended on the Souths cotton production that he declared, Cotton is King! Cotton was one of the most important commodities in the world in the nineteenth century; many factories in the Northern states as well as European countries such as Great Britain and France needed cotton for their important and prosperous textile industries. Yet this was all done on the backs of abused slaves who worked tirelessly night and day to pick the cotton of their masters plantations. In the early 1800s Northerners were content to allow slavery to reside in Southern states. Only when Southern leaders sought to expand slavery did many Northerners become concerned. The Missouri Compromise of 1820 was an attempt to maintain the balance in the Senate between slave and Free states. Senator Henry Clay, known as the Great Compromiser, worked out a compromise in which Maine would enter the Union as a free state while Missouri would be admitted into the Union as the northernmost slave state. As a result of the compromise, slavery was then prohibited north of the 36 °30 parallel making a clear distinction between the northern and southern states. This boundary would then later be challenged by events such as the Dred Scott case, yet it marvelously managed to avert war for forty years, and thus set it aside for a later generation to fight, but the damage to American nationalism helped to erode the so-called Era of Good Feelings in which the popular James Monroe presided as president. During 1828, Congress passed a tariff that protected Northern industries but had the unwanted consequence of driving up domestic prices. This, while beneficial to the growing industry in the North, greatly crippled the South who suffered as their economy largely depended on the import and export of domestic goods. As a result, this new bill outraged Southerners who began calling it the Tariff of Abominations. South Carolina spearheaded Southern concerns by citing the doctrine of nullification, which allowed individual states to nullify proclamations of the federal government that would be found to be unconstitutional or inhibit the states rights. The issue of nullification was taken up in the Senate in the famous Webster-Hayne debate in which Daniel Webster of Massachusetts, the Senates leading orator, responded by challenging the Souths apparent willingness to subvert the Union for regional economic gain. In doing so, he broadened the debate beyond land, tariffs, and slavery to a co nsideration of the very nature of the federal republic. In 1832 Congress modified the tariff of 1828 by retaining high duties on some goods, but lowering others to rates held before the treaty. A South Carolina convention, under the leadership of current vice-president John Calhoun, later that year adopted an Ordinance of Nullification, voiding the tariffs of 1828 and 1832 in the state. The claim was that because the South tended to export food and import manufactured goods these tariffs were abusive and unfair; this new Ordinance supported free trade and generally opposed protective tariffs. The South Carolina state legislature funded a volunteer army and threatened secession if the federal government tried to force the state to comply with the tariffs. President Jackson, though an advocate of states rights, responded forcefully and threatened to invade South Carolina if its leaders refused to participate in the collection of tariff duties. To the ambitious malcontents in South Car olina, he proclaimed emphatically, the laws of the United States must be executed. . . . The Union will be preserved and treason and rebellion promptly put down. Jacksons proclamation stimulated an outburst of patriotism all over the country, isolating South Carolina from the rest of the Union. President Andrew Jackson asked Congress to grant him the authority to use military force to collect tax revenues and to subdue South Carolina. Congress complied by passing the Force Bill of 1833; the bill gave the President the authority to close ports or harbors at his will. This in turn would require opponents to the tariff to travel a distance to carry out any threats or insurrection against federal facilities. Hostile acts against government facilities or personnel would then be considered pre-meditated and blatant. Fortunately, however, the president never had to resort to military action. The crisis was averted when Congress passed a bill that reduced the productive tariff the following year. These events were dubbed the Nullification Crisis and the Compromise of 1833. Though war was averted, South Carolina now became the hotbed of southern dissent. The crisis of 1850 may never have occurred if a more common resource was discovered in California. But since gold was so rare, and therefore very valuable, Californias population skyrocketed. By 1850 over 100,000 hoping-to-strike-it-rich settlers, also known as forty-niners, flocked to California in hopes of attaining vast wealth in the gold that was said to be so abundant there. Without waiting for federal approval, the inhabitants of California called a convention, framed a constitution that prohibited slavery, and applied to Congress for admission as a state without first becoming a territory, this was made possible due to the vast influx of people who had emigrated there from the east of the United States as well as those who had immigrated from other countries. California had become very populous. The questions of whether California should be admitted as a free state and slavery should be allowed in New Mexico and Utah, two other territories asking to be allowed into the Union a t the time, generated a great deal of controversy both within Congress and throughout the nation. President Taylor supported Californias admission. Though the slaveholding president supported the proposal, other slaveholders throughout the country did not follow suit. Many southerners quickly threatened that they would secede from the Union if California was admitted as a free state. The Great Compromiser Henry Clay then once again stepped into the fray and proposed a compromise to this problem; this would be known as the Compromise of 1850. The compromise itself was more a series of bills than an actual compromise, these bills included among other things, that California would enter the Union as a free state; a more stringent Fugitive Slave Law of 1850 was guaranteed to be rigidly enforced. The law itself was already present, but it was rarely followed due to it being so poorly enforced as well as fierce opposition from Northerners who refused to hand in runaway slaves to the ever unpopular slave hunters; a settlement of the boundary between Texas and New Mexico; an indemnity to be paid to Texas for the relinquishment of its claims to a large portion of New Mexico; the slave trade would be banned in Washington D.C. (District of Columbia) though the ownership of slaves would not be abolished in the capital. This idea arose mainly because in this time period many European nations, with which the United States of America did business with, had already abolished slavery throughout their country, and it would leave an unfavorable impression on a foreign diplomat to see slaves which were no longer allowed in their own country, still present in another with whom they were considering associating themselves with ; the Mexican Cession, or the land taken from Mexico as a result of Americas victory in the Mexican-American War, would be divided into two new territories, New Mexico and Utah. Both territories would determine the status of slavery in their areas by popular sovereignty. Popular sovereignty was a system that would determine whether the state or territory would be free or would allow slavery by mean of holding local elections in said state or territory, Democrats would advocate popular sovereignty during the election of 1860. The compromise was made official with the signing of President Millard Fillmore. This passage by Congress delayed the onset of the Civil War for more than eleven years. The Bleeding Kansas period came about due to the Kansas-Nebraska Act. Democrat and Illinois Senator Stephen Douglas introduced the Kansas-Nebraska Act to further the construction of a Transcontinental Railroad to Chicago despite being warned by Frederick Douglass that the bill was an open invitation to a fierce and bitter strife. For the Bill to pass he needed the votes of southern Democrats, who were unwilling to support him unless the new Territories needed to accomplish it were open to slavery. Douglas thought that by proposing that the status of slavery in the new territories be governed by the principle of popular sovereignty, he would satisfy both pro and anti slavery factions. However, his bill in effect, repealed the Missouri Compromise of 1820, which barred slavery north of latitude 36à ¯Ã¢â‚¬Å¡Ã‚ ° 30. This brought as consequence that the Southern Whigs voted with southern Democrats in favor of the measure, and the northern Whigs rejected it, creating an irreconcilable spl it that left Whigs unable to field a presidential candidate in 1856. In the congressional elections of 1854, the southern Democrats became the dominant voice both in congress and within the party due to the split with the northern Democrats. The Cotton Whigs, who had economic ties with southern slave owners, were convinced that the bill would encourage antislavery feelings in the north. They urged southern politicians to vote against the bill, but were utterly ignored. This convinced them that compromise with the South was impossible and the nation watched horrified as the residents of Kansas slaughtered each other in pursuit of sectional goals that increasingly seemed to represent the divisions of the country. Since popular sovereignty would decide Kansass fate, it seemed that the majority of Kansas antislavery farmers would align Kansas with the Free states. Proslavery sympathizers in neighboring Missouri were not about to stand by while their neighbor cast its lot with the free s tates on account of its land being fertile and perfect for growing and farming cotton, the white gold of the South. Soon, border ruffians crossed into Kansas with the intention of making it a slave state. Border ruffians terrorized Kansas and intimidated others to vote proslavery with vicious threats and cast fraud ballots during elections to help elect their candidates into office. In response, Northern opponents of slavery like the New England Emigrant Society began sending supporters to Kansas. Fighting soon erupted as advocates of slavery created a government in Lecompton, Kansas and their opponents established an antislavery government in Topeka. Shortly thereafter, proslavery forces massacred citizens of the antislavery town of Lawrence. In retaliation, a violent abolitionist named John Brown organized his own massacre of five suspected proslavery advocates at Pottawatomie Creek in 1856. The Democratic President Pierces decision to remain aloof from the events in Kansas furthe r damaged what was left of his partys cohesion. In the ensuing months it seemed as if Kansas would enter as a free state, but a new problem arose; enter President James Buchanan. The newly elected President Buchanan accepted the proslavery Lecompton Constitution, which would admit Kansas as a slave state. Certain democrats then agreed to unite with the young Republican Party in 1858 to oppose the Lecompton Constitution, their efforts were not in vain and Kansas was ultimately accepted into the Union as a free state. The election of 1856 attracted one of the highest voter turnouts in American history. Ordinary citizens were sharing the politicians concerns about the growing sectional rifts in the nation. The northern turnout also showed that the threat posed by expansion of slavery was greater than that posed by new immigrants. In 1856 the people of the United States heard about the looting and burning in Kansas, about John Browns massacre at Pottawatomie, and about the Sumner-Brooks incident on the senate floor, ostensibly causing the unprecedented voters outpour. In the latter incident, Senator Charles Sumner of Massachusetts suffered permanent injuries from an attack by Congressman Preston Brooks of South Carolina. Using abusive and accusatory language in his The Crime Against Kansas speech, Sumner had singled out for ridicule Senator Andrew Butler of South Carolina. Sumners rude and personal attack suggested that the senator was drooling. South Carolina, Sumner cried, had sent to the Senate a Don Quixote who had chosen a mistress who, though polluted in the sight of the world, is chaste in his sight- I mean the harlot, Slavery. Talk of sexual connection between white Southerners and slaves was always explosive. Senator Butlers nephew, Preston Brooks, did not bother to challenge Sumner to a duel. Brooks said that the Yankee would never give satisfaction and would therefore refuse or flee from the challenge. Instead, Brooks strode into the Senate chamber and, finding the Massachusetts lawmaker alone, brutally beat Sumner with his cane, nearly ending his life. In Brooks mind, he was simply avenging an intolerable affront to his uncles honor. Each man found his action perfectly justifiable and the action of the other outrageous. So far had the behavioral codes of the North and the South diverged, and their attitudes were mirrored by their respective sections. The nation lay as divided as the senators. President-elect James Buchanans support for a pro-southern decision by the Supreme Court further aggravated sectional differences. In Dred Scott vs. Sandford, a southern-dominated Supreme attempted, in vain, to solve the political controversy over slavery. Scott, a slave, had been taken by his owner to Illinois, a Free State, and Wisconsin Territory north of the Missouri Compromise line. During that time, Scott married another slave and had a daughter who was born in free territory, then returned to Missouri, a slave state. Once in Missouri Scott sued for his freedom and that of his wife and daughter on the grounds that residence in free lands had made them free. Chief Justice Roger B. Taney declared the Missouri Compromise unconstitutional asserting that the federal government had no right to interfere with the free movement of property throughout the territories. Taney dismissed the Dred Scott case on the grounds that only citizens could bring suits before federal courts and that b lack people were not citizens. The five southern members of the Supreme Court concurred with the decision along with one Northerner, Robert Grier. President-elect Buchanan had pressured Justice Grier into supporting the majority. Clearly as a sectional decision, Southerners expressed satisfaction and support for the Court, Northerners disagreed. They found themselves questioning the power of the Supreme Court to establish the law of the land. The racist attitude of the Supreme Court was a bitter blow to the free blacks in the North. The South was overjoyed with the Courts ruling. The North was outraged; Northern Democrats like Senator Steven Douglas of Illinois found it increasingly difficult to reconcile their support of popular sovereignty in the Dred Scott decision. Under Douglass definition of popular sovereignty, it was always the white majority that would make decisions about black mens freedom. Lincoln responded to this definition by stating that for a man to rule another man without his consent was tyranny. Lincoln succeeded in pressing Douglas on the issue of slavery in the territories after Chief Justice Taneys Dred Scott decision. Lincoln used this opportunity to attack Douglass popular sovereignty idea. For how could the people of a territory vote against slavery, if Chief Justice Taney said that every American had a right to carry his property with him? In response, Douglas introduced his Freeport Doctrine. The doctrine was dubbed after the Illinois town where Lincoln and Douglas had met for one of their debates. The doctrine said slavery could not exist without friendly legislation to support it. Anti-slavery voters could simply refuse to pass such laws and slavery would effectively be kept out of the territory. Douglas concluded then that popular sovereignty was entirely consistent with Chief Justice Taneys ruling. However, the Freeport Doctrine alienated many Southern Democrats. Douglas had actually stated the essence of the doctrine previous t o the debate at Freeport, but its prominent public assertion at Freeport contributed, along with other political disputes, to antagonizing those in the Southern United States who were demanding ever-increasing protections for slavery, and who subsequently insisted on the repudiation of the Freeport Doctrine in order to block Douglas presidential bid in 1860. Containing slavery became important to Northerners, who believed that as slavery expanded, Northern industrial capitalism would become limited. To fight this fear a new political party emerged in the 1850s, the Republicans, whose political goals were free labor, free soil, free men. The industrial capitalists, owners of the Norths factories and workshops had the most to gain by containing the spread of slavery and expanding capitalism. For example, as capitalism expanded, they hoped to expand the labor pool, by supporting a loose immigration policy, which in turn would drive down the wages that they would have to pay for workers. Just as the planters dominated the South, the industrial capitalists profoundly influenced the Norths political, economic and cultural system. In addition, their political and economic objectives often clashed with those of the Souths planter class. In the South, militant political leaders, referred to as fire-eaters due to their adamant nature to raise cont roversial disputes, especially with their northern counterparts. These fire-eaters chafed at the notion of containing slavery, let alone abolishing it entirely, naturally bringing about disputes between the two. These clashes were mostly due to slavery as the industrial capitalists wanted to expand the white labor pool and southern plantation owners wanted to keep their slave force. Though compromises such as the Missouri Compromise, the Kansas-Nebraska Act, and the myriad of bills proposed by Henry Clay in the Compromise of 1850, it helped to divert attention from the topic and to try and appease both sides, but conflict was inevitable. As discussed earlier, both the North and the South consisted of entirely different ideals and culture by the nineteenth century. These divisions were brought to light in both the violence of the Brooks-Sumner incident and the racist decision of the South-dominated Supreme Court during the Dred Scott case. By the time Abraham Lincoln, the sixteen pre sident of the United States of America, took office the southern had already seceded from the Union. There was no longer room for compromise, Lincoln was given two options; to allow the Union to crumble or fight to preserve it. They thought themselves to be to economically powerful, politically influential, and the North and the rest of Europe too dependent on their White Gold for slavery to be abolished. They were wrong.