Assignment: AUDITING THEORY
Your group will be responsible to conduct a research project on auditing issues that are covered in this class. The objectives of this project are as follows:
1. To acquaint you with the annual report of a publicly held company audited by a CPA firm.
2. To provide data and analysis for the practical application of certain steps in the audit process.
3. To allow you to develop research skills and experience working in teams, as is done in actual auditing.
Here are detailed instructions for conducting your research project:
1. The U.S. Securities and Exchange Commission (SEC) requires publicly traded companies to electronically file a variety of forms or reports (for example, 8-K, 10-K, 10-Q, and DEF-14a) and makes most of these electronic documents available on the Internet via EDGAR. EDGAR stands for Electronic Data Gathering, Analysis, and Retrieval system. The primary purpose for EDGAR is to increase the efficiency and fairness of the securities market for the benefits of investors, corporations, and the economy by accelerating the receipt, acceptance, dissemination, and analysis of time-sensitive corporate information filed with the agency.
Visit the SEC Web site (www.sec.gov) and get yourself familiar with the search engine EDGAR for company filings. Then choose a publicly held company with stocks actively traded on NYSE or NASDAQ and obtain a copy of its most recent 10-K report. Answer the following questions:
a. What is the company's industry?
b. What are its primary products or services?
c. Who are its customers?
d. Where is the company located?
e. What are the main financial characteristics of the company:
Total Assets
Equity
Revenue
Net Income (Loss)
Other relevant metrics
f. Who are the major competitors/peers of this company?
g. Look at the annual report:
What image does it intend to convey?
What messages are being communicated to the shareholders?Are these messages consistent with the disclosures in thefinancial statements?
2.Obtain outside information about the company and its industry. Answer thefollowing questions:
a.What are the key characteristics of the industry?
b.Where is the company in its life cycle?
c.Describe at least three most important factors for success in this business?
d.How does this company stand with respect to these factors?
e.What legal or regulatory matters are of concern for the company?
f.What social matters are of concern for the company?
3.Perform preliminary analytical procedures for the company:
a.Obtain the financial statement data for the current year and prior two years.Analyze the year-to-year change in account balance for the followingfinancial statement line items. Document the trend analysis in a formatsimilar to the following:
% Change % Change
Account Balance 2015-2016 2016-2017
Net sales
Cost of sales
Operating expenses
Operating income
Net receivables
Inventories
Accounts payable
Long-term debt
b.For the current and prior years, calculate the common financial ratios that are applicable to the company, including short-term debt-paying ability,liquidity activity, ability to meet long-term debt obligation, andprofitability ratios.
c.Compare the company's main financial indicators (market cap, revenue,employees, revenue growth, gross margin, net income, and EPS) with theindustry benchmark (you may find relevant information from YahooFinance).
4.Based on the background research and analytical procedures performed inStages a-c, summarize your observations about the company's business,including your assessment of the client's business risk. Prepare a broad auditplan:
a.Which transaction cycles are the high-risk areas?
b.Identify at least three risk areas in the audit of this company and describe:(1)the risk; (2) why you have assessed this as a specific risk; and (3) howyou would perform the audit to address this risk.
c.If management faced tremendous pressure regarding the entity's financialperformance, what opportunities might exist for them to engage infraudulent financial reporting?
5.Which audit firm performed the audit? What kind of opinion has the auditfirm issued on the financial statements (and on the internal control overfinancial reporting)? Are they consistent with what you expect based on yourprevious analysis?
Written Report:
You are required to submit a written report per group (prepared in Microsoft Word, not exceeding 12 pages in length; double-spaced with font size of 12). Your writing should be original and free from plagiarism (referring to the University Catalog's section on Academic Honesty). If you find useful information in an article or web site and you use it in some form in your paper, indicate where you got the information from by using quotations and proper references. Use of reference material and citations are expected in a research paper. The final copy of the report should have page numbers with a Table of Contents and Bibliography. Charts and tables summarizing your findings may also be included as appendices in your report.