QUESTION

Advanced Auditing 

PA Tasks 1 – 3 Background Information

Client: Pure Gain Meals (PGM)

PGM is a small public company that processes and packages food. The company was founded by three local area farmers and has grown from a small grain milling shop to a publicly owned/traded company, which was completed through an IPO in January, year 5. 

PGM is the largest employer in a relatively small city (population 200,000). Local farmers have modified both what they grow and their crop management methods in order to qualify as preferred produce vendors for PGM. PGM processes and packages cereals, bread mixes, pancake mixes, “organic” flour, fruit & nut bars, and other similar products. Some products are sold wholesale to bakeries and other packaging companies, while others are sold as finished goods to grocery chains and local boutique retail stores. As demand grew for their products, PGM expanded operations, and is planning an expansion through internet sales during year 8.  

The board of directors appointed a three-member audit committee. The committee is made up of independent board members whom the board believes to be financially sophisticated. The committee chair, Mr. Ed, is a retired farmer and is one of the original investors in PGM. He made his fortune trading commodities, not farming. He is considered financially sophisticated although his formal education ended in high school. The other committee members are a local banker, Mrs. Mooney, and a local CPA, Mr. Bill. Both are well-versed in the financial needs of small business and professional firms, but neither has experience with SEC-compliant audits. Mrs. Mooney has not made loans to PGM, but has a portfolio of $10 million of loans to PGM personnel including loans to the CEO, CFO, and controller. Mr. Bill prepares the tax returns for all of the officers of PGM. He does not work directly for PGM. 

Dividend Policy:

The company pays out approximately 70% of net income in dividends. 

The three original owners each have a 10% ownership in the company and receive 10% of the dividends. 

Chief Executive Officer (CEO)Chief Operating Officer (COO)

Chief Marketing Officer (CMO)

 

Other key officers have a 5% ownership in the company and each receives 5% of dividends.

Chief Financial Officer (CFO)

Chief Administrative Officer (CAO)

COO, CMO, CFO, and CAO report to the CEO. 

 

 

Additional information:

During year 5, PGM acquired a large grocery store chain as a client. To accommodate this client, PGM purchased new, larger milling and packaging equipment, expanded the loading dock and storage capacity for finished products, and signed a contract with a national trucking company. 

The expansion caused an increase in cost of goods sold as local farmers could not meet needs. Additional suppliers of raw produce were required to meet demand. These suppliers were higher-cost producers whose products must be transported from outside the area. Quality suffered as no time/resources were added at the outset to review the quality of the produce in advance of receipt. 

Buildings and equipment are owned by PGM. Delivery trucks are leased for local deliveries and outsourced to national carriers for more distant delivery points. Drivers of leased trucks are employees of PGM. Plant and equipment are depreciated using straight-line methods over 5 – 40 years. 

The pest control firm retained by PGM is owned by the CAO’s brother.

PGM plans to offer a profit-sharing plan for non-executive employees beginning with year 7. The company set aside $300,000 for the year for into the plan pool. The pool will be allocated according to job level. (See Profit Sharing Plan Allocation). 

Processes:

Wheat, rice, oats, and corn are delivered in bulk by truck with 20 short tons per load. These are dumped bulk from trucks into a receiving pit and augured to bins. Raisins, cranberries, almonds, and other nuts and additives come in bags or canisters, which are loaded onto pallets and moved via forklift to storage bins. Grains are ground, mixed and blended with dried produce, nuts, and additives to make products. 

 

PGM’s storage facilities have steel bins with concrete floors for raw produce and finished products waiting to be bagged and boxed. This reduces maintenance cost and helps control product quality. 

PGM must maintain good controls over local vendors to guarantee “organic” or natural produce, including the non-use of chemicals. 

 

ADVANCED AUDITING

Competency 3031.1.3: Auditing Business Processes - The graduate plans, assesses risk, and performs audit procedures on various business processes.
Competency 3031.1.5: Sampling - The graduate uses statistical and nonstatistical sampling methods to test controls and audit assurances.
Competency 3031.1.6: Conducting an Audit - The graduate documents audit evidence and communicates the results of an audit.

Task 3

Introduction:

A well-executed audit provides value to a company by offering assurance on financials and other information. In this task, you will apply your knowledge of the audit process to develop an audit plan for a company.

Scenario:

As an associate at a regional CPA firm, Freedom rock Accounting (FRA), you are asked to serve as an associate auditor on your firm’s annual audit of a bulk milling and food processing firm, Pure Grain Milling (PGM). The audit will include a full report, including the annual audit opinion written to investors and an audit of the firm’s 401(k) plan.
You recognize that your firm’s subsidiary, Freedom Rock financial Services (FRFS), is the financial advisor who has sold the client, a private investor, their 401(k) plan and continues to serve as the registered representative of record to the plan.

Requirements:

Your submission must be your original work. No more than a combined total of 30% of the submission and no more than a 10% match to any one individual source can be directly quoted or closely paraphrased from sources, even if cited correctly. Use the Turnitin Originality Report available in Taskstream as a guide for this measure of originality.

You must use the rubric to direct the creation of your submission because it provides detailed criteria that will be used to evaluate your work. Each requirement below may be evaluated by more than one rubric aspect. The rubric aspect titles may contain hyperlinks to relevant portions of the course.

Note: The following prompts will require the use of the attached “Financial Statements” and “Background Information” document in order to perform high-level analysis as needed to reach conclusions regarding the current-year audit of the company.

A.  Develop an audit plan (suggested length of 3−5 pages) for PGM by doing the following:

1.  Discuss two risks from the attached “Financial Statements” that represent issues that warrant additional attention during this audit, using the audit risk model.

a.  Identify one question for each risk identified in part A1 that you could ask senior management in order to obtain additional information.

b.  Identify the senior management team members, by job title, with whom you would address those risks.

c.  Identify additional auditing procedure(s) you could use to address these risks after your inquiry.

i.  Describe how these additional auditing procedures could address these risks.

2.  Identify the internal controls for the acquisition and payment cycle.

a.  Identify where these internal controls should be placed in the cycle.

3.  Identify the internal controls for the payroll and personnel cycle.

a. Identify where these internal controls should be placed in the cycle.

4.  Identify the internal controls for the inventory and warehouse cycle.

a.  Identify where these internal controls should be placed in the cycle.
 

B.  Develop a testing plan (suggested length of 2–4 pages) for PGM by doing the following:

1.  Discuss one financial statement account to be tested within the acquisition and payment cycle from part A2.

2.  Discuss one financial statement account to be tested within the payroll and personnel cycle from part A3.

3.  Discuss one financial statement account to be tested within the inventory and warehouse cycle from part A4.

4.  Identify the sampling approach for each of the three financial statement accounts from parts A2–A4 to be tested.

a.  Justify your choice of the sampling approach in the acquisition and payment cycle.

b.  Justify your choice of the sampling approach in the payroll and personnel cycle.

c.  Justify your choice of the sampling approach in the inventory and warehouse cycle.
 

C.  Describe the necessary audit evidence gathered in parts A and B to support management’s assertions.
 

D.  Acknowledge sources, using in-text citations and references, for content that is quoted, paraphrased, or summarized.
 

Note: Specific citation of accounting rules is not required.

WJT Task 3 (0516)

	Not Evident	Approaching Competence	Competent	Score/Level
Articulation of Response (clarity, organization, mechanics)	Responses are unstructured or disjointed. Vocabulary and tone are unprofessional or distract from the topic. Responses contain pervasive errors in mechanics, usage, or grammar.	Responses are poorly organized or difficult to follow. Terminology is misused or ineffective. Responses contain errors in mechanics, usage, or grammar that cause confusion.	Responses are organized and focus on the main ideas presented in the assessment. Word choice is pertinent and clearly conveys the intended meaning to the audience. Responses reflect attention to detail. Mechanics, usage, and grammar promote understanding and readability.
A1. Risks from “Financial Statements”	A discussion of 2 risks is not provided.	The discussion of 2 risks has limited detail or is illogical by representing irrelevant issues that do not warrant additional attention during the audit; or the audit risk model is incorrectly used.	The discussion of 2 risks is sufficiently detailed and logical by representing relevant issues that warrant additional attention during the audit. The audit risk model is correctly used.
A1a. Questions for Risks	Questions for each of the 2 risks are not identified.	The identified questions are irrelevant to each of the 2 risks or are inappropriate to ask senior management to obtain additional information.	The identified questions are relevant to each of the 2 risks and are appropriate to ask senior management to obtain additional information.
A1b. Senior Management Team Members	Senior management team members are not identified.	The identified senior management team members have incorrect job titles or are inappropriate with whom to address the risks.	The identified senior management team members have correct job titles and are appropriate with whom to address the risks .
A1c. Additional Auditing Procedure(s) Identification	An additional auditing procedure(s) is (are) not provided.	The identified additional auditing procedure(s) is (are) irrelevant to the risks or illogical.	The identified additional auditing procedure(s) is (are) relevant to the risks and logical.
A1ci. Additional Auditing Procedure(s) Description	A description of how additional auditing procedures could address risks is not provided.	The description of how additional auditing procedures could address risks has limited detail or is poorly supported.	The description of how additional auditing procedures could address risks is sufficiently detailed and well-supported.
A2. Acquisition and Payment Cycle Internal Controls	Internal controls for the acquisition and payment cycle are not provided.	The identified internal controls for the acquisition and payment cycle are illogical or not aligned.	The identified internal controls for the acquisition and payment cycle are logical and aligned.
A2a. Placement of Acquisition and Payment Cycle Internal Controls	Placement of internal controls for the acquisition and payment cycle is not identified.	The identified placement of the internal controls for the acquisition and payment cycle is illogical or not aligned. Context is not provided for cycle placement.	The identified placement of the internal controls for the acquisition and payment cycle is logical and aligned. Context is provided for cycle placement.
A3. Payroll and Personnel Cycle Internal Controls	Internal controls for the payroll and personnel cycle are not provided.	The identified internal controls for the payroll and personnel cycle are illogical or not aligned.	The identified internal controls for the payroll and personnel cycle are logical and aligned.
A3a. Placement of Payroll and Personnel Cycle Internal Controls	Placement of internal controls for the payroll and personnel cycle is not identified.	The identified placement of the internal controls for the payroll and personnel cycle is illogical or not aligned. Context is not provided for cycle placement.	The identified placement of the internal controls for the payroll and personnel cycle is logical and aligned. Context is provided for cycle placement.
A4. Inventory and Warehouse Cycle Internal Controls	Internal controls for the inventory and warehouse cycle are not provided.	The identified internal controls for the inventory and warehouse cycle are illogical or not aligned.	The identified internal controls for the inventory and warehouse cycle are logical and aligned.
A4a. Placement of Inventory and Warehouse Cycle Internal Controls	Placement of the internal controls for the inventory and warehouse cycle is not identified.	The identified placement of the internal controls for the inventory and warehouse cycle is illogical or not aligned. Context is not provided for cycle placement.	The identified placement of the internal controls for the inventory and warehouse cycle is logical and aligned. Context is provided for cycle placement.
B1. Financial Statement within Acquisition and Payment Cycle	A discussion of 1 financial statement account to be tested within the acquisition and payment cycle from part A2 is not provided.	The discussion of 1 financial statement account to be tested within the acquisition and payment cycle from part A2 has limited detail or is illogical, or the financial statement account is inappropriate.	The discussion of 1 appropriate financial statement account to be tested within the acquisition and payment cycle from part A2 is sufficiently detailed and logical.
B2. Financial Statement within Payroll and Personnel Cycle	A discussion of 1 financial statement account to be tested within the payroll and personnel cycle from part A3 is not provided.	The discussion of 1 financial statement account to be tested within the payroll and personnel cycle from part A3 has limited detail or is illogical, or the financial statement account is inappropriate.	The discussion of 1 appropriate financial statement account to be tested within the payroll and personnel cycle from part A3 is sufficiently detailed and is logical.
B3. Financial Statement within Inventory and Warehouse Cycle	A discussion of 1 financial statement account to be tested within the inventory and warehouse cycle is not provided.	The discussion of 1 financial statement account to be tested within the inventory and warehouse cycle has limited detail or is illogical, or the financial statement account is inappropriate.	The discussion of 1 appropriate financial statement account to be tested within the inventory and warehouse cycle is sufficiently detailed and logical.
B4. Sampling Approach for Financial Statement Accounts	Sampling approaches for each of the 3 financial statement accounts from parts A2–A4 to be tested are not identified.	The identified sampling approaches for each of the 3 financial statement accounts from parts A2–A4 to be tested are illogical or not aligned.	The identified sampling approach for each of the 3 financial statement accounts from parts A2–A4 to be tested is logical and aligned.
B4a. Justification of Sampling Approach within Acquisition and Payment Cycle	A justification of the choice of the sampling approach in the acquisition and payment cycle is not provided.	The justification of the choice of the sampling approach in the acquisition and payment cycle is illogical or is poorly supported.	The justification of the choice of the sampling approach in the acquisition and payment cycle is logical and well-supported.
B4b. Justification of Sampling Approach within Payroll and Personnel Cycle	A justification of the choice of the sampling approach in the payroll and personnel cycle is not logical and is not provided.	The justification of the choice of the sampling approach in the payroll and personnel cycle is illogical or is poorly supported.	The justification of the choice of the sampling approach in the payroll and personnel cycle is logical and well-supported.
B4c. Justification of Sampling Approach within Inventory and Warehouse Cycle	A justification of the choice of the sampling approach in the inventory and warehouse cycle is not provided.	The justification of the choice of the sampling approach in the inventory and warehouse cycle is illogical or poorly supported.	The justification of the choice of the sampling approach in the inventory and warehouse cycle is logical and well-supported.
C. Audit Evidence	A description of necessary audit evidence gathered in parts A and B is not provided.	The description of the necessary audit evidence gathered in parts A and B does not support management’s assertions or is illogical.	The description of the necessary audit evidence gathered in parts A and B supports management’s assertions and is logical.
D. Sources	The submission does not include both in-text citations and a reference list for sources that are quoted, paraphrased, or summarized.	The submission includes in-text citations for sources that are quoted, paraphrased, or summarized, and a reference list; however, the citations and/or reference list is incomplete or inaccurate.	The submission includes in-text citations for sources that are properly quoted, paraphrased, or summarized and a reference list that accurately identifies the author, date, title, and source location as available.

Pure Grain Milling, Inc.  (PGM)
Schedule of Payroll Expenses and Estimated Profit Sharing
FYE December 31, Year 7
		#	Head				Annualized		Head	Job	Non-Exec Profit Sharing
Department		Dept	Count	Title		Salary	Hrly Pay	Salary	Count	Grade
Executive		2	1	CEO		1,20,000			1
			1	Executive Administrative Assistance			20,000	20,000	1	20	1,429
Finance		7	1	CFO		90,000			1
			1	AP/AR Manager			36,000	36,000	1	30	11,250
			2	Acct Payable/Account Receivable Clerk			27,000	54,000	2	20	2,857
			2	Staff accountants			36,000	72,000	2	30	11,250
			1	Financial analyst			42,000	42,000	1	30	5,625
Operations		22	1	COO		90,000			1
			1	Administrative Assistant			22,500	22,500	1	20	1,429
			1	Purchasing Agent			45,000	45,000	1	40	15,000
			1	Manager of Incoming Materials and Dock			42,000	42,000	1	40	15,000
			2	Dock and Warehouse Raw Materials Workers			30,000	60,000	2	20	2,857
			1	Head Miller			45,000	45,000	1	40	15,000
			9	Millworkers			36,000	3,24,000	9	20	12,857
			1	Manager of outgoing produce and loading dock			45,000	45,000	1	40	15,000
			2	Outgoing dock and warehouse finished goods workers			30,000	60,000	2	20	2,857
			3	Truck drivers/loaders			40,000	1,20,000	3	30	16,875
Marketing		6	1	CMO		90,000			1
			1	Administrative assistant			24,000	24,000	1	20	1,429
			4	Sales and service reps			36,000	1,44,000	4	45	75,000
Administration		9	1	CAO		90,000			1
			1	Administrative Assistant			22,500	22,500	1	20	1,429
			1	Head of Human Resources			60,000	60,000	1	50	22,500
			1	Head of Outsourcing			50,000	50,000	1	50	22,500
			1	Staff Attorney			60,000	60,000	1	50	22,500
			1	Property Manager			50,000	50,000	1	50	22,500
			2	Janitors			24,000	48,000	2	20	2,857
			1	Maintenance and Repairs			40,000	40,000	1	30	5,625
Total Staff		46	46			$      4,80,000		14,86,000	46
								4,80,000
								$       19,66,000
Notes on Job Grades
Salary range $20-35k, plus 10% target profit share, Admin personnel, and factory and maintenance workers
Salary range $30-45k, plus 15% target profit share first line supervisors, specialized workers
Salary range $40-55k, plus 20% target profit share, managers with responsibility for small departments, and business lines
Salary range $40-55k, plus 50% target profit share, special range for sales reps, significant part of pay is for sales and service success
Salary range $50-65k, plus 25% target profit share middle managers, specialized professionals
Executive Level.  Salary  and profit share set by board of directors and via contract
				Profit sharing allocation = $300,000		$      3,00,000