auditing – writing assignment ii – spring 2021

Writing AssignmentIICase -The Assessment of Riskat Great Gifts, Inc.Please carefully read  the  following  information  about Great  Gifts,  Inc.,  and  then carefully read the assignment instructions and guidance.Asnoted  below,  imagine for  the  purposes  of  the  case  writing  assignment that  the current  date  is 5 December  2017.    The  covid  pandemic  has  no  impact  or  role  in  this case.Company  BackgroundGreat  Gifts,  Inc., (“the Company” or “GGI”)designs  and markets a variety of relatively inexpensive gift items for all occasions.  Gifts sold by the Company  include  items  of  jewelry,  desk  accessories,  clocks,  calendars,  pen  and  pencil sets, lapel pins, and the Company is planning a new line of offerings in the home décor area.      The   Company   outsources   some   of   its   manufacturing   functionsto   Asian manufacturers, and conducts some manufacturing operations itself.  Gift items are sold to  national  retailers  like  Target, to largeand small  gift  shop  chains,  and  independent individual gift store  owners.   Although  the  Company  is  a  gift  business,  there  are  few seasonal  effects  on  sales,  since  the  Company  supplies  gifts  to  almost  all  religious  and secular holidays and special occasions throughoutthe year.GGI is a small public company.  GGI was engaged as a client of your firm in early 2016 for the audit of their 31 December 2016 financial statements.  That audit was completed in early 2017, and as of now (the current date is 5 December 2017), you are preparing to execute the year-end phase of the auditof the 31 December 2017 financial statementsin mid-January  2018.   Interim  testing (primarily  tests  of  controls) was  accomplished  in November 2017.  You were assigned to this audit as the audit senior toward the end of calendar  year  2017,  after  initial  planning  and  interim  tests  of  controls  had  taken  place.  (Due to staff turnover, the previous audit senior on the audit, as well as the three of the four  staff  auditors  that  had  been  assigned  to  the  auditlast  year,  have  all  left  the accounting firm.)As a public company, GGI requires an audit of both their year-end financial statements, as well as internal control.  Your firm will complete an integrated audit of the financial

statements  and  internal  control.    Your  firm  also  provides  tax  services  to  GGI.Again, you  are  preparing  to  lead  the year-end  phaseof  the  audit beginning in  January  2018.  The  last  day  of  fieldwork  is  scheduled  for  mid-February,  and  the  issuance  of  the  audit report will likely take place at the end of February.GGI  organizes  their  products  into  three  product  lines.    Their  two  historical  and traditional lines have been personal gifts like jewelry and watches, and office gifts such as desk accessories and pen and pencil sets.  Due to the sluggish or non-existent growth in  the  two  traditional  lines,  management planned  the  addition  of  a  third  line:home décor  items,  which  it  intends  to  sellto  home  décor  retailers  across  the  country.   The expansion  of  products  was  planned  in  2016, with  research  and  roll-out  scheduled  for2017.You are now reviewing working paper documentation relating to the background of the Company (in  the  permanent files),  as well  as working  paper  documentation  relating to last year’s audit(in last year’s current files), and this year’s interim audit work(in  this year’scurrent files).Please  review  the  following  excerpts  from  relevant  documents  involving  the  planning and  execution  of  the  current  year  audit.    Then  review  the  academic  and administrative requirements of this assignment at the end of the case materials.Excerpts fromthe document….“Notes and observations from my review of the GGI Permanent File, the GGI current year filesrelating to the 31 December 2016audit, and the GGI current year filesrelating to planningand interim testing for the 31 December 2017audit”(These notes were writtenby YOU,the newly appointed senior auditor, as you reviewed the files noted above…)•During   2017,   the   CEOwho   had   led   the   Company   for   7   yearsresigned.  According  to  news  reports,  the  resignation  was  a  submitted  in  order  to  spend more time with his family.  Shortly thereafter, the Chief Financial Officer and the Controller also left the Company.  A new CEO and CFO were hired before mid-year(after an “acting” CEO and CFO had been appointed and served for a couple  months)  but  the  Controller  position  had  not  been  filled  as  of  November 2017.In their first “conference call” with analysts who follow the companyand issue  earnings  estimates,  both  the  CEO  and  the  CFO  guaranteed  the  Company would meet its earnings targets.Coincidently, the new CEO is the owner of the building that the Company rents as its corporate headquarters.•The previous senior auditoron the engagement noted during interim testing that the  roll-out  of  the  new  product  line  has  not  been  going  smoothly.    In  the  early months  of  2017,  the  Company  was  engaged  in research  relating  to  a  new

procedure   to   make   their   pottery   products   in   the   new   home   décor   line unbreakable, making the products desirable to families with small children.  The Company  indicated  that  the  result  of  that  research  was  successful, and the new technology was scheduled  to  be incorporated  into  the  manufacturing  process.  However, implementing the new process took longer than expected.  Shipments of  product to  retailers  relating  to  products  in  the new  home  décor  line  did  not commence  before  the  holiday  period  of late 2017,  and  the  roll-out  was  deferred until 2018.  Because of the success of the research and long-term benefits that the research  was going  to  provide  to  the  Company,  management  has  capitalized $175,000 of  research costs as a deferred asset onthis year’s(2017) balance sheet, and intends to amortize those costs over 20 years.•Sales trends of  product  from  the  old,  traditional  product  lines  continued  to  be flat or negative during 2017.  Management was hopeful that the last weeks of the holiday ordering periodin 2017 would bring increases in sales sufficient to equal the previous year.•During 2017, management of  the Company installed a new  software package to improve  accounting  and  processing  surrounding the  purchases  and  payablesprocess at the company.  Whenthe audit team was developing an understanding of  internal  control  in  this  area(in  July  2017),  significant  problems  were  noted, including the presence of two material control weaknesses in the system.  Based on this finding, the previous senior auditor decided to test controls over payables and  purchases at  interim (November  2017) to  be  sure  they  were  working.    The work performed by the audit team has not yet been reviewed.  •In  October  2017,  GGI  entered  into  an  arrangement with  a new  customer retail chain to provide gift products for the followingValentine’sDay.  Manufacturing of  these  products  began  in  late  2017,  manufacturing  was  scheduled  to  end  in early  January,  and  shipment  of  the  product  was  scheduled  for  mid-January.  Management  believes  that  shipment  and  delivery  is  assured,  and  recognized $250,000 of revenue in October 2017.•Under terms of their employment contracts, the new CEO and CFO will receive a bonus  of 50%  of their base  salary  if  net  income for  2017 exceeds  $12,000,000.  Interim   financial   statements   for   31 October 2017 indicated   net   income   of$10,500,000, with a forecasted amount of $12,100,000 for the end of December.•Because of the robust economy, the Company has reduced the amount reported in  the  Allowance  for  Doubtful  Accounts  on  the  balance  sheet.    The  Company uses   the   allowance   method   (income  statement   approach)   and   reduced   the estimated percentage of sales deemed uncollectible from 3.0% to 1.5%.•In  2016,  management  adjusted  the  inventory  balance  for  an  impairment  due  to holding approximately $150,000 of whatappeared to be obsolete inventory.  The Company continues to hold the inventory, but believes, due to the strength of the economy  in  2017,  that  the product  will  be  sold  by  the  end  of  the  year,  and  the write-off wasunnecessary.  Therefore, management has reversed the impairment write-off from last year into incomethis year.  The previous senior auditor noted

that controls over this area were particularly strong, as the CEO herself initiated and recorded this entry.•After the Company Board Meeting in September 2017, the Audit Committeemet with  the  auditor  for  30  minutes  before  the  members  had to leave  to  catch  their planes.    The  next  meeting  of  the  Audit  Committee  is  scheduled  for mid-March 2018.A Board member who is a brother-in-law of the new CFO sits on the Audit Committee.    The  Internal  Audit  Department  manager  was  laid  off  in  2016  in  a cost-cutting  measure.    The  Company  is  seeking  to  hire  another  manager,  at  a lower salary, to report to the Controller regarding internal audit matters.•Over recent years, labor relations at the Company have deteriorated.  Employees consider themselves underpaid, as flat profitability in recent years has prevented the   granting   of   raises.      Although   negotiations   are   continuing, the   union representing warehouse  and  transportation  workers  hasthreatened  to  walk  out prior  to  the  end  of  the  year  if  wages  are  not  increased.Administrative  and financial office workers, who are not unionized, are also upset about the lack of raises.Requirements:Using as reference material your textbook and other written materials posted to the Canvas site, as well as material discussed in lecture and Zoom sessions, please address the following requirements:1.Create  a bullet  pointlist  of  risks present  at  GGI,  using  a  sentence  or  two  to describe  the risk  factor.   After  each  risk  you  identify,  pleasebrieflynote  where each risk might be classified according to the components of the engagement risk model.    If  you  believe  that an identified  riskcould  be  classified  in  the  various intersections of the model, associating a particular risk with just one of the risk areas  is  sufficient. (Remember,  there  are  often  many  ways  to  think  about how identified risks “fit in”to the engagement risk model, and many can beclassified at the areas of intersection between ABR, CBR, and AR.)It should  be very easy to identify  at  least  10  different risk  factors  in  the  case,  as  there actuallymany morethan 10.2.Based on your identification of risk factors, please assess the overall level of ABR, CBR,and the  risk  of  material misstatement  (RMM also  known  as IR+CR)separately, each on a scale of very low, low, medium, high, and very high.Briefly(as in a couple sentences) explain your assessments.3.The  factspresented  above  indicate  that  management  hasdeparted,  or  plans  todepart,from  generally  accepted  accounting  principles ina number  of  situations (each of which is an indicator or evidence of risk).  Identify one of those cases(it may also be  on your  bullet  point  list  of  risks  above), brieflydescribe  what management is  doing  wrong,  and brieflydescribe  what  they  should have  done instead.In  order  to  do  this,  you will  need  to  assess  the  reasonableness  of  the accounting  or  proposed  accounting  for the particular  issue  you  choose.If  you don’t recall the particulars of how to account forcertain issues, you may need to

engage  in  a  brief  bit  of  accounting  review/research  to  assess  whether  the accounting or proposed accounting is in conformity with GAAP.4.Thenidentify,for  one  of  the  misstated or  likely-to-be  misstated accounts,one management   assertionrelating   to   that   account that management   is likely misstating.(Each  possible  or  probable misstatement  will  misstate  at  least one accountand at least one assertion.  Identify a misstated account, and a particular managementassertion relating to it that is or willlikelybe misstated.)5.Briefly, what   is   the   implication of   the material   weaknesses   noted   in   the purchases and payables process for the integrated auditandthe audit report(s)?6.Bonus-The previous senior auditorwho supervised the interim audit work and testing of controls made an illogical and incorrect decision.  Briefly identify that mistakeand explain why it was a mistake.Administration:In order to organize your paper and facilitate my review, please attend to thefollowing instructions regarding the format and style of your paper.  PAY VERY CLOSEATTENTIONTO  THE  FOLLOWING  GUIDANCE.Failure  to  follow  these instructions   may   result   in   point   deductions   from   your   mark   on   this writing assignment.•You MUST complete this writing assignment,submit it to me, and earn at least 50% as a grade on the paperin order to fulfill course requirements.  If you donot submit a writing assignment, I will submitan deferredgrade for the course, which  will  remain  until  this  requirement  is completed,  or  when  the  deferred grade expires  and reverts  to  an “F” grade.If  you  earn  less  than  50%  on  this assignment, Iwill  return  it  to  you  for  re-writingand  improvement beforeI submit a final grade.  Remember, this assignment is weighted with 10% of your overall grade inthe course, so do your best work!•Please prepare    your paperin MS    Word,    and    email    it    to    me at [email protected]  toThursday,  6  Mayat  11:59PM.   This  isa  short extension  of  the  due  date,  and  provides  three  weeks  to fit  this  into  your schedule  and work  on  this  assignment.   Please  DO  NOT  send  your  paper  to me  through  Canvas.Send  it  to  my  email  addressabove.Please  include  a separate cover page that includes your name and student number.•There are five distinct requirements noted above (or sixif you address the bonus question).   Please  address  all  five(maybe six) requirements in  the  order  they are  presented above.   You should number  the  requirements  in  your  paper.  Please  be  sure  to  READ CAREFULLY  what  you  are  being  asked,  and  please respond fully and completely to that “ask”.  •You may write the case utilizing bullet points where appropriateor required, but bullet points should be written incomplete sentences, not phrases.  Make sure I can understand the point you are trying to make.  •Please use a single-spaced, block paragraph format(left and right justification), with  one  space  between  paragraphs  or  headings(similar  to  the  presentation of

the first  page  of  the case  above).Use  a 12  point  font  and standard  margins.I believeyou can address the requirements above in 3 pages.  Please don’t exceed 4 pages.•Please do  not  re-type  the  questions/requirements  from  aboveand  include them  in  your  paper. You  can  simply  usethe  numbers  of  the  questions(1 through 5or 6)to  divide  your  paperinto  sections.You  may  use  a  short description  of  the  requirement for  a  heading  or  section  title if  you  choose,  but please do not re-type the entire requirement.•Please see the “Important Information about Course Requirements” page of the  course  website  to  view  a  document  presenting  guidance  and  tips  for writing assignments.•Please do  NOT  spend  significant  portions  of  your  write-up  recounting  the  facts of  the case,  or  presenting  a  summary  of  the  case.   Assume  I  have read the  case information,  am  familiar  with GGI,  and  most  importantly,  am  familiar  with auditing  terminology,  theory,  and  practice.You do NOTneed  to define auditing terminology in yourcase write-up.Doing so is unnecessary, and will detract from the quality of your paper.•Be careful about the dates of events in the case.You may benefit from drawing a  timeline  of  events  tomake  sure  you  are  clear  about  what  happened  when.  (Don’t include a timeline in your write-up.)•This  is  an individualassignment.  Although you may discuss the case you’re your classmates, please be VERY CAREFUL to ensure that what you submit is your workand yours alone.  Please refer to the ACCTNG4435course syllabusfor guidance and information about academic integrity/misconduct.•Your paper should be well-written and professionally presented.I will evaluate both  the  content and  the  style  of  the  document.Content  will  account  for approximately 70%  of  the  pointsrelating  to  the  paper,  and  style  (grammar, punctuation, presentation, etc.) will account for approximately 30%of the points.  Pervasively  poor  writing and  presentation may  cause  you  to  lose all the  points relating  to  style,  so  please  invest  the  effort  you  need  to  improve  your  paper before submission.  PLEASE PROOFREAD YOUR PAPER, AND PERFORM A FINAL  REVIEW  TO  BE  SURE  YOU  HAVE  FOLLOWED  THE  DIRECTIONS AND GUIDANCE ABOVE.•Early submissions are welcome and appreciated!•If you have any questions, I am very happy to answer them for you.

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