Audit Procedures and Internal Control Evaluation for Smackey Dog Foods, Inc.

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Audit Procedures and Internal Control Evaluation for Smackey Dog Foods,Inc.Q1: Discuss how the SEC has influence (if any) over the audit of Smackey Dog Foods, Inc.Smackey Dog Foods, Inc. is a privately owned company and is not subject to SEC regulations.However, their accounting standards and financial statements must be in conformity with GAAP.During the first stage of the audit, I did research on the dog food industry to better familiarizemyself with the risks currently associated with this industry, such as current economic conditionsand how they have affected this industry, competition, and the audit procedures that are usuallyinvolved in the audit of this type of business.Smackey Dog Foods, Inc. is a small cap privately owned organization in Chicago area. Thecompany was started by the group of sisters. Currently, the organization has grown and islooking towards expanding their business into vertically in various demographics with moreeconomicgrowth.Thecompanycurrentlymanufacturestwokindsofdogfood,theirconventional regular dog food that they started the company with, and their Best Boy Gourmetdog food line which is packaged fresh and served in only single eating pouches. The bank theyare getting the loan for expansion wants audited statements of the company for sanctioning theloan amount.In such situation, the company has hired Keller CPA’s to do a complete audit ofthe company.Q2: Discuss the essential activities involved in the initial planning of an audit. How do theseall specifically to the Smackey Dog Food client?Smackey is at risk of a material misstatement within their inventory due to internal controls inregards to their returns process. This raises a red flag to the auditors that special attention needsto be paid when reviewing the inventory and warehouse cycles. Also, there is no segregation of

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duties for Henry, the employee who monitors the production and shipments. He is involved inevery part of the operation of making, sending, and receiving inventory and raw materials. Thus,those records need to be audited and tested for accuracy to ensure that the inventory recordsmatch the shipping and receiving documents by completing substantive tests of transactions inthis area. The other area with questionable internal controls is the accounts receivable. Since theaccounts receivable will be used as collateral for the business loan Smackey Dog Food isapplying for, the risk of misstatement in this area is very high and will need to have a largernumber of tests and evidence. One other area of focus for internal controls that the audit teamshould test is the property, plant and equipment accounts to ensure that the balances are correctlystated(Porter, 2008). The audit team needs to run tests to ensure that transactions are correctlyrecorded as assets in repairs and maintenance expense, lease expense, supplies, small tools, andsimilar accounts.Q3: Discuss the 4 stages of the audit and the major activities performed by the auditor ineach phase. Give an example of how each of these specifically applies to the Smackey DogFood, Inc audit. For instance, examine the apparent internal control weaknesses andpossible negative outcome of each.The audit team must perform analytical procedures and tests of balances specifically on theiraccounts receivables and allowance for bad debt. Since Smackey is on the market for a loan toexpand their business, then they may be at risk of overstating their accounts receivable by notrecording their bad debt allowance. The biggest vendor Smackey has, Pup Stores, Co., iscurrently facing a lawsuit from an animal rights group. Because of the legal fees involved in thesuit, their cash reserves are depleted andare having to look at closing some stores.Since they

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