Answer & Explanation:Please do not accept if you cannot meet deadline or do not understand what is needed. I have attache Week 1 – 3 scenarios and answersI need help with the following:
Develop an engagement
letter on behalf of the audit partner, Scott Payne CPA, for the annual
year-end audit of RPC. Be sure to mention any relevant regulatory
requirements in your letter, and address the letter to appropriate RPC
personnel. (Week 1 assignment): 1,200 – 1,500 words
double-spaced
Develop an audit plan for
RPC to present to Scott Payne CPA for review. In addition to basic
year-end information, it should address specific procedures based on the
first four facts regarding RPC and revealed to you by Scott. (Week
2 and 3 assignment). This plan should be 1,500 – 3,000
words double-spaced.
Your team lead and senior
audit manager and firm partner, Scott Payne, CPA, believes it is time for
you to begin writing an audit plan under his supervision. The engagement
letter and test procedures are now compiled from weeks 2 and 3, so it is
now time to ensure that each test step correspond to the relevant financial
and management assertions and as well as distinguished between the
standards relevant to all audits (GAAS) and those additional standards
relevant to the audit of public companies under the PCAOB.
As a reminder, those
assertions are the following:
Existence
Completeness
Accuracy or Valuation
Rights and Obligations
Presentation and
Disclosure
You will ensure that each
test step has an objective that is related to each assertion. Incorporate
the four procedures suggested in Weeks 2 and 3 to test the relevant
assertions in the financial statements. This can be performed in a chart
format.
Review the GAAS standards
and determine if any potential issues or a violation exist that would
threaten the standards of the audit.
Determine the sampling methodology that should be used for each test
step designed in Weeks 2 and 3. Examples of various sampling methods are
statistical and nonstatistical methods. Provide reasoning for the selected
sampling methodology
week_1_engagement_letter.docx
week_2.docx
week_3.docx
Unformatted Attachment Preview
Scenario for Week 1
The audit plan (all assignments) will be based on the following scenario.
You are a senior auditor assigned to the team performing an audit for Restorative Pharmaceutical
Corporation (RPC), a 10-year-old publicly held corporation listed on the New York Stock Exchange (NYSE),
which specializes in anti-aging products such as vitamins, protein-infused beverages, and dietary
supplements. RPC’s corporate office is located in San Diego, CA. Its annual sales are approximately $100
million. Restorative’s products have been endorsed by noted doctors and talk show hosts on daytime
network television. Restorative also develops and markets products through television commercials,
drawing clients to their Web site to accomplish direct sales as well as via major drugstore chains. None of
Restorative’s products are FDA-approved, as these are part of a class of products which do not require
approval to be marketed in the United States. However, the products are subject to scrutiny when claims
regarding various outcomes are assured for clients; general product safety is critical. Products are
manufactured primarily in Tijuana, Mexico and are imported for distribution from the main warehouse in
National City, CA which is between the corporate office and the manufacturing plant. Your team lead and
senior audit manager and firm partner, Scott Payne, CPA, has recruited you to write the engagement
letter for the year-end audit of Restorative Pharmaceutical. In addition, he believes it is time for you to
begin writing an audit plan under his supervision.
Week 1 Deliverable
The engagement letter is one of the first official deliverables in the audit-planning process. It clarifies the
responsibilities and expectations of each party (i.e., the client and the CPA firm) and this is an important
element of managing engagement risk, especially the risk related to litigation. The engagement letter
includes the acknowledgment of expectations for both the client and the CPA firm conducting the
engagement.
Restorative Pharmaceutical Corporation (RPC), a 10-year-old publicly held corporation listed on the NYSE
which specializes in anti-aging products such as vitamins, protein infused beverages, and dietary
supplements. RPC’s corporate office is located in San Diego, CA.
Develop an engagement letter on behalf of the audit partner, Scott Payne, CPA, for the annual year-end
audit of RPC. Assume that the project fee for the audit will be $50,000. Be sure to mention any relevant
regulation requirements in your letter, and address the letter to appropriate RPC personnel.
ANSWER:
Scott Payne, CPA
Certified Public Accountants
September 8, 2016
Restorative Pharmaceutical Corporation
San Diego, CA
Dear Sirs,
AUDIT ENGAGEMENT LETTER
We are pleased to approve our understanding of the services we are to provide for
Restorative Pharmaceutical Corporation “RPC” “The Company” for the year ended
December 31, 2015 with regards to annual financial reporting requirements in conformity
with generally accepted auditing standards.
We will audit the Company’s balance sheet as of 2015, and the related statements of income,
and the cash flow statement for the year then ended 2015, with the aim of expressing an
opinion on them. The financial statements are the sole responsibility of the Company’s
management and our responsibility is to express an opinion on the financial statements
based on our audit.
The purpose of this letter is to establish the basis on which we are to act as auditors
of RPC and the corresponding areas of responsibility of the company and of ourselves.
Responsibilities of Management of The Company
The management of RPC has the responsibility with regards to:
a) Preparation and reasonable presentation of the financial statements in
conformity with accounting principles generally accepted in the United States
of America and these statements should be free of material misstatements
whether due to error or fraud.
b) The strategy, implementation, and maintenance of internal control relevant to
the preparation and reasonable presentation of the financial statements.
c) Ensuring that all transactions relating the year of audit have been duly
documented in the books of accounts.
d) The company has the responsibility to provide to us the necessary information
with regards to provision of financial statements and books of accounts to
enable us to carry out analysis of accounts.
e) Offer to us unlimited accesses to employees of the company whom we
determine are necessary to provide us with audit evidence.
f) Providing us with written representations required to be obtained under
professional standards and written representations that we deem fit for the
audit.
An audit does not relieve the management or those charged with administration of
these responsibilities.
Auditor’s responsibility with regards to the audit
We have the statutory authority to report as to whether your financial statement
reflects a true and fair view of the company’s affair. In order to arrive at our opinion,
we will seek to determine whether:
a) The company has maintained accurate accounting records and they are in
agreement with the books of accounts.
b) Whether we have obtained all the information, disclosures and explanations, which
we deem necessary for the purpose of our audit.
c) All transactions have been duly recorded in the books of accounts.
d) It’s our responsibility to arrange and conduct the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement,
whether caused by error or fraud.
e) We have a certified duty to report if the accounts do not conform in any material
respect with appropriate accounting standards, unless in our opinion the noncompliance is supportable in the circumstances.
Scope of the audit
a) Our audit will be conducted in agreement with the generally accepted auditing
standards (GAAS) and we will seek an understanding of the accounting systems
and internal control systems in order to weigh their adequacy as a basis for the
preparation of the accounts and to establish whether proper books of accounts have
been maintained by the Company and we expect to obtain such complimentary
evidence so that we can be able to draw reasonable conclusion from them.
b) Due to the large number of transactions of your company, the audit will include
inspecting, on a test basis, proof supporting the amounts and disclosures in the
financial statements.
c) Our measures will include tests of documented evidence collaborating the
transactions recorded in the accounts. At the conclusion of our audit, we will
request certain written statements and disclosures from you about the
financial statements and matters related thereto.
d) While the audit is considered to provide reasonable guarantee by detecting
errors and material misstatements result from from the financial statements,
it cannot be relied upon to disclose all material errors and fraud. Nevertheless,
we will disclose to you of any material errors or fraud that come to our
attention.
e) Due to the test nature of the audit and other essential restrictions connected
with an audit together with inherent restrictions of internal control system,
there is an inherent risk that some material misstatements may remain
undetected. Therefore we will only provide a reasonable assurance level as
opposed to an absolute assurance level.
FEES
Our fees are computed on the basis of the time devoted to the audit of your company
by our staff and also based on the levels of skill and accountability involved. For the
purposes of this audit, the audit fee will be a fixed fee of $50,000.
AGREEMENT OF TERMS
Once you have agreed, to the terms and conditions of this letter, it will be implied that
from one audit meeting to another, until it is replaced arising from material changes
in audit scope or other circumstances, the letter will remain binding. We shall be
pleased if you could confirm in affirmative by writing to us that you agreement to
these terms by signing and returning the acknowledgement copy of this letter, or
otherwise, let us know if they are not in agreement with your understanding of our
terms of engagement.
We appreciate the opportunity to serve you.
Yours truly,
Scott Payne, CPA
We agree to all the terms of this letter.
Signed…………………………………………………………
Date…………..
For and on behalf of
Restorative Pharmaceutical Corporation
REFERENCES
Hayes, R., Wallage, P., & Gortemaker, H. (2014). Principles of auditing: an
introduction to international standards on auditing. Pearson Higher Ed.
Messier Jr, W. (2016). Auditing & assurance services: A systematic approach.
McGraw-Hill Higher Education.
Millichamp, A. H. (2002). Auditing. Cengage Learning EMEA.
Whittington, R., & Pany, K. (2001). Principles of auditing and other assurance
services. Irwin/McGraw-Hill.
Week 2 Scenario:
You are the senior auditor assigned to the team performing an audit for Restorative Pharmaceutical
Corporation (RPC), a 10-year-old publicly held corporation listed on the New York Stock Exchange (NYSE)
which specializes in anti-aging products such as vitamins protein infused beverages and dietary
supplements. RPC’s corporate office is located in San Diego, CA.
The audit firm’s lead and senior audit manager and firm partner, Scott Payne, CPA, has requested that you
develop two audit/internal control procedures which address the following issues which emerged during
the past three reviews of RPC:
1.
2.
The company’s newest product, an acai and mango blend smoothie, is under scrutiny by the FDA
because claims have been initiated by consumers indicating that the product does not “improve
memory by 50% and lower cholesterol count by 50% in those over 50” as RPC’s advertisements
had claimed. A class action lawsuit is pending for $2 million. RPC’s attorneys indicate that there
may be some merit to the claims, although the product is generally safe. No entry or disclosure
was provided in the year-end financial statements.
The company’s supply chain is subject to some risk due to the Mexican infrastructure. Also,
certain inventory shipments did not arrive in a timely manner over the border, and this resulted
in lost sales of approximately $5 million over the course of a year
Answer:
RPC has a pending claim, which is a lawsuit worth a contingency of
$2 million. The audit matter in question here is auditing contingencies i.e.
legal suit and claims. Since in this case the actual or potential litigation,
claims, and assessments have been identified during the audit, although the
management of RPC has not disclosed the matter, the auditor should work to
obtain the audit evidence pertinent to the following:
a) The period in which the underlying causes for legal action occurred.
b) The likelihood or probability of an unfavorable outcome as such
outcome will have material consequences to the financial reports.
c) The amount or range of any potential loss which in this case have been
determined at $2 million
Since no disclosure has been made as of that date from the management
a description and evaluation of the lawsuit by FDA which is in existence
as of the date of the financial statements, the auditor need to seek written
representations from the management and the legal counsel.
Since the audit procedures did earlier have explicitly indicated that
there is an actual claim causing a risk of material misstatement to exist, the
auditor should from now seek direct contact with RPC’s external legal
counsel. The auditor should do so through a letter of inquiry prepared by
management and sent by the auditor requesting the RPC’s external legal
counsel to communicate directly with the auditor.
In addition to the direct communications with the RPC’s external
legal counsel, the auditor should also seek direct communication with the
RPC’s in-house legal counsel if they exist. However, audit evidence obtained
from in-house legal counsel should not in any way substitute that obtained
from the external counsel. In case of management refusal to permit the
auditors to have direct communication with the legal counsel, this will give
rise to limitation of scope to the auditor and in this case the auditor may issue
a qualified opinion or a disclaimer of opinion.
The auditor should then request the RPC’s legal counsel to inform the
auditor in writing of the pending lawsuit and an assessment of the outcome of
the lawsuit as well as an estimate of the contingency value or costs involved
should the lawsuit have an unfavorable outcome. Where RPC may have
changed its legal counsel or in the event that the legal counsel has resigned,
the auditor need to inquire from the management about the reasons for any
changes in legal counsel and such should constitute management
representation.
In this case, the auditor needs to confirm with certainty about the
following to mitigate against the risk of frauds and misreporting:
a) All recorded transactions have occurred.
b) All of the transactions relating to that period are recorded.
c) The transactions have been recorded accurately.
d) The transactions have been recorded in the correct accounting period.
e) The transactions have been recorded in the proper accounts.
On confirming that all these are in order with regards to the sales, the
auditor need to perform substantive and analytical procedures to confirm the
sales figures as well as stock control procedures of RPC to ascertain that the
goods were actually ordered by doing tests of control over the merchandise
order system while ensuring proper segregation of duties. The auditor needs
to confirm the purchasing documents including the invoices, order documents,
shipping documents etc. Where the goods have been subsequently received,
the auditor should ascertain the physical inventory, which should be reported
in the closing balances. In the case where the inventory was received after the
reporting period, the auditor should perform audit procedures for subsequent
events and ensure that the loss in sales can be accounted for through the
inventory in stock.
The auditor needs to perform a supply chain audit to assess the supply
chain organization, processes, and systems and ensure that they are not prone
to control risk by the personnel in charge. If the auditor is able to associate the
loss in sales with the delays in the supply chain and audit evidence supports
the assertions of the management, then the auditor would be in a position to
make an unqualified opinion on the audit report as well as point on the weak
links in the supply chain so that the management can work on them in the next
period.
REFERENCES
Arens, A. A., Elder, R. J., & Beasley, M. S. (2007). Auditing and
assurance services: An integrated approach. Prentice Hall.
Louwers, T. J., Ramsay, R. J., Sinason, D. H., Strawser, J. R., & Thibodeau,
J. C. (2013). Auditing and assurance services. New York, NY:
McGraw-Hill/Irwin.
Whittington, R., & Pany, K. (2001). Principles of auditing and other
assurance services. Irwin/McGraw-Hill.
Week 3 Scenario:
You are the senior auditor assigned to the team performing an audit for Restorative Pharmaceutical Corporation
(RPC), a 10-year-old publicly held corporation listed on the New York Stock Exchange which specializes in anti-aging
products such as vitamins protein infused beverages, and dietary supplements. RPC’s corporate office is located in
San Diego, CA.
The audit firm’s lead and senior audit manager and firm partner, Scott Payne, CPA, has requested that you develop
two audit/internal control procedures which address the following issues which emerged during the past three
reviews of RPC:
1.
2.
The company has an equal balance of equity and debt which compose its capital structure. It is subject to
a number of debt covenants, including its current ratio, which should be maintained above 1.5 per the
debt covenant. The year-end current ratio attained is 1.45. There is no opportunity to refinance short
term debt and reclassify liabilities to ameliorate the ratio.
A number of sample products are provided to fitness centers, health fairs, marathons, and charitable
walking events. A significant stock sample pull amounting to $200,000 for the New York marathon was
not recorded as an inventory reduction for this promotional event, and was discovered during the
physical inventory at year end.
Answer Week 3:
Internal Control Procedure
Restorative Pharmaceutical Corporation
Policies and procedures that are put in place to see to it that the Company runs in an
efficient and effective manner are referred to as internal controls. The following is a report that
details the internal control procedures that are aimed at addressing the issues that emerged at the
Restorative Pharmaceutical Corporative Company during the audit that was conducted.
The Restorative Pharmaceutical Corporative Company has an equal balance of equity and
debt, which make up its capital structure. Restorative Pharmaceutical Corporative Company
subject to some debt covenants, including the ratio that the company holds, which should be
upheld above 1.5 per the debt agreement. The current year-end ratio attained by the Restorative
Pharmaceutical Corporative Company 1.45. There is no opportunity to refinance short-term debt
and reclassify liabilities to ameliorate the ratio for the Restorative Pharmaceutical Corporative
Company. The Restorative Pharmaceutical Corporative Company provides some sample
products to fitness centers, health fairs, marathons, and charitable walking events. A significant
stock sample pulls adding up to the Restorative Pharmaceutical Corporative Company did not
document $200,000 for the New York marathon as an inventory discount for this advertising
event. The Restorative Pharmaceutical Corporative Company discovered the amount during the
physical inventory at year-end.
Due to the above findings, the senior auditor found it fit to propose the following two
audit procedures that would go a long way in addressing the issues that emerged due to the
auditing that was carried out at the Company: Physical Audits and Approval authority (Sathe,
Bhalkar, Bhadre, & Mosamkar, 2015).
According to the report, The Restorative Pharmaceutical Corporative Company has an
equal balance of equity and debt, which make up its capital structure (Mussoi Ribeiro, Silva do
Carmo, Lopes Fàvero, & Nelson Carvalho, 2016). The report goes on to show that Restorative
Pharmaceutical Corporative Company subject to some debt covenants, including the ratio that it
holds now, which should be kept above 1.5 per the debt covenant (Mussoi Ribeiro, Silva do
Carmo, Lopes Fàvero, & Nelson Carvalho, 2016). Since the current year-end ratio attained by
the Restorative Pharmaceutical Corporative Company 1.45 there is a need to step up the approval
authority to safeguard the power of confidentiality within the operations of the Corporation
(Sathe, Bhalkar, Bhadre, & Mosamkar, 2015). Since there is no opportunity to refinance shortterm debt and reclassify liabilities to ameliorate the ratio for the Restorative Pharmaceutical
Corporative Company, it will do the Corporation some good if it will safeguard the assets that it
has against the liabilities that it has (Sathe, Bhalkar, Bhadre, & Mosamkar, 2015). The
Corporation should then wait for the opportune time for it to regain its wealth and bargaining
power.
Since some sample products are provided to fitness centers, health fairs, marathons, and
charitable walking events by the Restorative Pharmaceutical Corporative Company and were not
accounted for it is important that physical audits are conducted to track down the last units of
expenditure that are expended by the Corporation (Mussoi Ribeiro, Silva do Carmo, Lopes
Fàvero, & Nelson Carvalho, 2016). There are numerous computer errors that can escape the
human agent and …
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