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Call No 1 AUDIT PLAN TEAM PROJECT ACC 567 – FALL, 2021 OVERALL DESCRIPTION AND REQUIREMENTS: Objectives of the Project: 1. To provide data for the practical application of certain steps in the financial statement audit process, especially planning, the consideration of risk, and the use of analytical review procedures. 2. To acquaint students with various SEC filings (such as Forms 10-K, 10-Q, and proxy filings) and other available information about publicly-traded corporations. 3. To develop teamwork and communication skills, which are essential in the auditing profession. Note: For this assignment, you can/should write in first person, but use ‘we’ instead of ‘I.’ Summary of Requirements: Your report will provide broad insights related to an audit plan for your client company’s upcoming fiscal year-end audit. This assignment is worth 150 points in total and is broken down into two separate parts as described separately. The grade for your report will be based on the analysis you provide, the writing style you exhibit, the comprehensiveness of your review of relevant sources and outside research, and the conclusions that you reach. A minimum of 7, publicly-available sources must be obtained by each team member (for the entire assignment, not for each part), and at least 3 of your sources must be other than the course textbook; the company’s website; SEC filings (e.g., 10-K, 10-Q, and Def 14A Proxy, etc.); Investopedia and Wikipedia, and sources used for financial statement data, ratios, and stock prices. Note: YOUR ENTIRE REPORT IS TO BE STATED IN YOUR OWN WORDS. Use of direct quoting from your sources should be limited. Regarding your references, you must cite your sources (e.g., 10-K, 10-Q, etc.) throughout your report for ANY INFORMATION that you did not analyze or know. Be sure to include the page numbers from EACH source each time you cite that source. (I suspect that for much of your ‘Understanding the Entity’ section, you will cite the 10-K as your source.) Referencing can be done multiple ways; however, your team’s final report must employ consistent referencing throughout your report, and it must be very clear and identifiable such that it is easy for me to determine (and look up and review, as necessary) all of the sources identified in your report. IMPORTANT: Be sure to indicate the specific page number(s) for each reference and include the entire path (url) for on-line sources used. Your ‘References’ page should be broken down by each team member (i.e., there should be a separate ‘References’ page for each person) and your ‘References’ pages should be placed near the end of the report, as discussed below. Students will be required to use a referencing system such as DB-1, p. 24; DB-2, p. 83, etc. as will be explained to the class. HELPFUL TIP: It is very important to agree as a group how you will reference your sources throughout your report --- and agree on this early on! 2 SPECIFIC REQUIREMENTS: 1. UNDERSTANDING THE ENTITY. Use the most recent company filings to answer the following: * a. When was the company formed? What is the company’s industry? Where is the company headquartered and where are key locations? (Consider a brief summary table that provides insight regarding company locations, such as its stores, plants and facilities, key distribution centers, etc.) * b. What are the company’s primary products and sources of revenues? (Be sure to fully describe their products and major business segments, if applicable.) Are there major customers and/or suppliers that the company discloses in its 10-K? Using the most recent 10-K as your source, provide a brief summary table that breaks down the company’s revenues (and earnings/income, if available) by country/region and/or business line for the current and prior year. (Besides Item 1 of the 10-K, another source might be a footnote on segment reporting.) Briefly comment on anything that ‘stands out’ from any of this information. * c. Find the audit report for the financial statements in the most recent 10-K. Which public accounting firm audited the financial statements included in that filing? How long has that firm served as the company’s auditor? What was the date the audit report was issued and what type of report was issued (i.e., was it a standard, unqualified opinion, and if not, explain how it is different?) Were there any critical audit matters identified by the auditor, and if so, briefly describe. Overall, how should a user of the financial statements interpret the meaning of the report that was issued? * d. In the 10-K, what opinion type was rendered by the auditor with respect to the company’s internal controls over financial reporting (ICFR) and what was the date of the auditor’s report? Explain what this opinion implies. Did the CPA firm issue separate reports for the audits of the financial statements and ICFR or was a combined report issued? (Pages 237-241 in the text should be helpful for this requirement.) * e. What were last year’s audit fees? What amount did the company pay its external auditor for non- audit services? I suggest preparing a summary table for this. [See the most recent annual proxy statement (Def. Proxy 14A) for this information.] From a shareholder’s perspective, do you believe there might be a cause for concern related to the break-down of those fees? Explain. f. Prepare a table that provides the following summary measures related to the company as of or through the balance sheet date for each of the past 3 years (i.e., you will need to obtain prior year 10-K’s): - Total assets, total revenues, net income (attributable to the company), and total number of employees. Be sure to identify the sources here and sufficiently discuss all of this data. Please note that since these financial statements are audited, we accept them as being fairly stated. So the purpose of this analysis is not to identify potential misstatements, but rather help us in understanding the entity and its recent performance and identify potential implications for the current year’s audit plan based on this data (e.g., any ‘risks’ related to any trends identified?). g. Indicate the market price of the company’s stock as of 08/31/2021 (the first day of class) as well as their prior fiscal year-end date (i.e., so you are examining their stock price at dates that are approximately one year apart). Calculate the percentage change between those two dates. Similarly, calculate the percentage change over the same two dates for two of the following major indices of your choice (i.e., Dow (DJIA), NASDAQ Composite, NYSE Composite, S&P 500). Explain why/how the company’s stock performance could be important information to the auditor. h. See the ‘Ratio Guidelines’ on the next page before starting this requirement. Gain a perspective of the company’s standing compared to one of its primary competitors (chosen by you) by performing ratio analysis. Use the most recent annual data filed with the SEC (i.e., the most recent year from the 10-K --- for both your company and your chosen competitor) and calculate the ratios described on pages 161 - 163 in the course textbook. (Exception: You can omit calculating the operating cash flow ratio). In an appendix, be sure to show EACH ELEMENT in the numerator and denominator for each ratio as opposed to just showing the quotient (i.e., I want to see the numbers in your calculations, not just the formulas for the ratios). If 3 you added or subtracted some amounts in your numerator or denominator, that should be shown in your calculations in the appendix. Provide a summary table in your main report that facilitates your analysis, showing the ratio results for the company vs. its competitor. Again, all of your computations should appear in the appendix at the very end of your submission --- for both your client company and their competitor. [IMPORTANT NOTE: This is one exception of a requirement in which you are permitted to contact the other sub-team of your group --- solely to agree upon the competitor that you want to analyze. You should calculate the ratios for the same, agreed-upon competitor. However, you should not be in communication with the sub-team for any other purpose on this requirement.] Analysis: Provide a relatively detailed commentary related to your ratio comparisons with specific emphasis on any relatively significant differences between the company and its competitor. [IMPORTANT NOTE: Since last year’s financial statements were audited for both companies, you can accept those amounts as accurate. Thus, for this particular requirement you are NOT trying to identify potential misstatements here. Rather, you are using these ratios to help you understand the entity, focusing on anything that stands out with respect to the company’s standing versus one of its primary competitors. For example, you should be evaluating if the company is relatively more/less liquid, more/less profitable, more/less efficient in moving inventory, etc.] Ratio Guidelines: 1) Other than as noted in the points listed below, calculate the ratios exactly as they are listed in the textbook (e.g., do NOT calculate any ‘Averages’ in any of your ratio computations). 2) In the numerator for the quick ratio, only include current assets that are above inventory on the balance sheet. [If the company lists any ‘Restricted Cash’ that should be excluded from the numerator as well.] 3) When calculating A/R turnover you ideally should use ‘Credit Sales.’ However, if credit sales information is not available (and most likely, it will not be available), you can just use ‘Sales’ in the calculation. (But please be aware that using ‘Sales’ may alter the usefulness of this ratio for comparison purposes.) 4) Use Total Liabilities in the numerator for the Debt/Equity ratio. Also, in the ‘Understanding the Entity’ ratio requirement, if Total Stockholders’ Equity is negative for the most recent year for either company, then