Paper Topic:
Keystone Case Study
Keystone Case Study Keystone Case Study Question 6C-1 Section Purpose Content Audit approach Significant risks Significant accounting auditing matters Planning materiality Scheduling staffing plan The method of internal control to be used Risks identified about KCN and its environment Need to review accounting methods with FASB requirements Using operating results as basis for estimating materiality amounts for planning purposes Tentative dates for internal audit Control procedures ' same as last year . Plan to perform tests of controls to assess control risk at
less than the maximum for financial statements
The risks are (1 ) strategy to sell to customers with high credit risks and (2 ) company officers performance based bonuses on quarterly reports
Methods to be reviewed with FASB requirements are (1 ) revenue recognition , and (2 ) capitalizing certain costs of development
Steady growth in sales and earnings in last three years . Hence , using percentages of financial statement bases ' to , compute planning materiality
The audit schedule is (1 ) Begin interim audit work November 10 , 20X5 (2 ) Complete interim audit work by November 15 , 20X5 (3 ) Issue management letter on interim work by November 30 , 20X5 (4 ) Observe physical inventory December 30 , 20X5 (5 ) Begin year-end audit work February 12 , 20X6 (6 ) Complete fieldwork by February 20 , 20X6 (7 ) Closing conference February 2 (8 ) Issue audit report by March 5 , 20X6 (9 ) Issue letter required by financial agreement by March 5 , 20X6 (10 ) Issue updated management letter by March 19 , 20X6
The staffing time requirements for the engagement are Question 6C-2
Risk Implications and response (1 ) KCN has engaged in a strategy to sell to customers with higher credit risk (2 ) The officers of the company receive significant bonuses based on quarterly results
Increased number of higher credit losses , which may exceed the increase in sales . This risk is dealt by daily review of aging of accounts receivable by Loren Steele , controller
These are increased expenditures , which may not produce desirable results . This risk can be checked by giving bonuses on basis of performance by officers , on quarterly intervals Question 6C-3
Development Software which is capitalized by this standard , must be amortized in an organized and logical method over the estimated useful life of the software . This estimated useful life for amortization has to be consistent with the one used for planning the software 's acquisition
For every module of a software , the amortization should start as that module has been tested successfully . If the use of that module is relying on completion of some other module , the amortization of that module should commence when both that module and the other module has been successfully tested
Any additions to the book value or changes in useful life should be treated appropriately . The change (s ) have to be accounted for the period of the change and future periods . No adjustments to be done to previously done amortization . When replacing current internal use software with a new software , then the unamortized cost of the old software has to be expensed when the new software has acheived...
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