Hello, I have the following assignment which is a continuation from the previous assignment I received help from Trans Tuturs on. I would like to have the same instructor I had the last time, as I was...

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Answer To: Hello, I have the following assignment which is a continuation from the previous assignment I...

Robert answered on Dec 20 2021
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6-1
Keystone Computer & Networks, Inc (KCN)
6C-1 SOLUTION: KCN Analysis of Audit Strategy
Section Purpose Content
OBJECTIVES OF THE
ENGAGEMENT
To describe the services
that is to be rendered to
the client.
The objectives are (1) audit of KCN's financial
statements for the year ended 12/31/X5, and
(2) issuance of a letter on compliance with
covenants of the client's letter of credit
agreement.
BUSINESS AND INDUSTRY
CON
DITIONS
To describe the nature of
KCN's business and
industry.
KCN sells and services micro-computers,
networking hardware and software to business
customers. The industry is sensitive to
economic conditions and very competitive,
with KCN competing with companies much
larger than itself. KCN’s long-term success
depends on its ability to attract and retain
qualified information technology personnel.
The annual growth in spending for information
technology products and services is expected to
be 6% per year for the next three years.
PLANNING MEETINGS To indicate meetings held
with client and with CPA
engagement team.
At this point, one meeting has been held with
client personnel and one with the engagement
team.
OWNERSHIP AND
MANAGEMENT
To describe the owners
and management of the
company.
KCN is privately owned by Terry Keystone,
Mark Keystone, John Keystone, Keith Young,
and Rita Young.
Terry and Mark Keystone participate in
management.
OBJECTIVES, STRATEGIES
AND BUSINESS RISKS
To describe KCN’s business
objectives, major
strategies and the risks
related to achieving its
objectives.
The major objective of KNC is to increase
revenues by 10% and increase net income by
12% for each of the next 3 years. Major
strategies include: (1) aggressive advertising,
(2) sales to customers with higher risk profiles,
and (3) new software development. The
primary risks include (1) advertising may not
create the desired results, (2) credit losses may
exceed benefits of increased sales, and
software development activities may not
6-2
produce products.
MEASUREMENT AND
REVIEW OF FINANCIAL
PERFORMANCE
Describes the methods
used by management to
monitor performance.
Measures used to monitor performance
include: (1) inventory and receivables
turnover, (2) aging of accounts receivable, (3)
sales and gross margins by type of revenue, (4)
net income, and the total inventory balance.
PROCEDURES TO OBTAIN AN
UNDERSTANDING OF THE
CLIENT AND ITS
ENVIRONMENT
Describes the procedures
used by the auditors to
obtain an understanding
of the client and its
environment.
The procedures used include (1) review of
information from the prior-year’s audit, (2)
Inquiries of management, (3) reading board
minutes, (4) review of monthly performance
reports, (5) review of industry reports, review
of the company’s website, and (6) review of
articles in the Wall Street Journal.
AUDIT APPROACH To describe the overall
approach to be taken on
the audit.
Consistent with the previous year's audit, the
CPAs will plan to perform tests of controls to
assess control risk at less than the maximum
for most assertions.
SIGNIFICANT RISKS To describe the significant
risks identified by the
auditors.
Two significant risks were identified: (1) KCN
has engaged in a strategy to sell to customers
with higher credit risk, and (2) the officers of
the company receive significant bonuses based
on quarterly results.
SIGNIFICANT ACCOUNTING
AND AUDITING MATTERS
To describe particular
accounting and auditing
matters of concern.
Two particular concerns exist: (1) proper
accounting for extended warranties and (2)
capitalization of software costs.
PLANNING MATERIALITY To identify an amount to
be used as a measure for
planning materiality.
Based on an analysis of sales, total assets, and
pretax net income, an amount of $70,000 will
be used as a measure of planning materiality.
SCHEDULING AND STAFFING
PLAN
To provide the schedule
for major portions of the
audit, and the staffing
requirements for the
engagement.
The section includes major dates beginning
with interim audit work through the issuance of
an updated management letter. A total of 118
hours are budgeted for the audit.
6-3
6C-2 SOLUTION: KCN Risks
Risk Implications and Response
1. KNC has engaged in a
strategy to sell to
customers with higher
credit risk.
The...
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