Lakeside Auditing Case Study
January 27, 2011
1: An independent annual audit can provide credibility to information, and this could be very helpful for decision making. In this specific case, the owner of the Lakeside requires an independent CPA firm to perform an annual audit because the owner wants to show the public a “good-look” of its financial statements; since he would like to receive more capital by making his company public. In addition, good-looking financial statements of the company could provide good credit from the bank. To the lakeside company, the owner would like to provide audited financial statement to the bank to obtain the loan and receive ...view middle of the document...
The auditor has an obligation to discuss his plans to obtain the expertise with the client.
3: Because a significant portion of management’s compensation is represented by bonuses or some other incentives, the value of which is contingent upon the company’s achieving unduly aggressive targets for operating results or financial position. In financial accounting, it is one method of earning management called “cookie jar”. When a company is in a growth stage, it possesses the highest sales growth, the highest capital expenditure, and the lowest dividend payout, and more requirement of outside capital fund. When a company sustains more financial pressure, it may identify more material misstatement due to fraud. In this specific case, the bonus plan will give every manager and assistant manager a cash bonus each January based on the income earned by his or her store during the previous year. The managers and assistant managers in that store may exaggerate the income earned to get the cash bonus.
4: A CPA firm faces an independence problem in auditing the output of system, which the same firm designed and installed to a public company. According to Sarbanes-Oxley, it prohibits financial information systems design and implementation service to a client by auditors. However, auditors are allowed to design, develop, install, or integrate an information system unrelated to the financial statement or accounting records under AICPA Code of Professional Conduct Requirements for non-public companies.
5: He should do the followings with the permission of the manager when he visits Lakeside’s headquarters and warehouse:
A: Trace the cash purchases, credit card purchases and check transactions. Compare the test check endorsements stamps and bank clearing house stamps with other checks to ensure that they match and that somebody has not opened up an account at another bank under the same name or a name similar to the client’s business name.
B: Talk with new hired employees about the payroll and make sure there is no “ghost” on the payroll.
C: Carefully test the accuracy of the payroll tax liability and actual tax deposit for federal and state payroll tax to ensure that there have been no intentional tax overpayments credited to any individual income tax withholding account.
D: New vendors added to the list should be investigated to ensure that they actually exist and there is no ghost vendor.
E: Select a random bank reconciliation prepared internally by staff and check it carefully to ensure that all checks have been accounted for and see if there is any missing check
F: During the visit to the warehouse, inventory should be carefully examined. He may open up and examine the contents of boxes of inexpensive inventory, particular if there are some marks on the boxes. This is because usually the employee puts an expensive item in a box for an inexpensive item when no one is looking and carefully place and mark the box.