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Audit Plan of Keystone Computers and Network, Inc.

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Audit Plan of Keystone Computers and Network, Inc.

Outline

In the audit plan of Keystone Computers and Network, Inc., the audit strategy adopted and the risk involved in the company are analyzed. For this purpose, auditors have conducted an audit of the financial statement for the past three years and issued letters based on clients’ letters of credit. The auditors have detected two major risks involved with the company, that is, the company’s strategy to sell products on a credit basis, and to give a bonus to the officers every quarter. Tests of controls assure the auditors of the effectiveness of internal control policies and operations of the company, which help in reviewing the errors in financial statements.

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The other reason is selling goods to uncreditworthy clients. The result of this risk is the possibility of incurring an increased bad debt expense for the company. The company’s strategy to maximize the bonus of the officers will result in a misstatement of the result published every quarter. For avoiding the risk of overstatement of the sales revenue, auditors suggest a review of sales records every quarter year, with respective delivery receipts.

Audit Plan

Section Purpose Content
Objectives of the Engagement. To describe the services to be rendered to the client. The aims are to check the financial statements of KCN for the previous three years and to give a response letter based on the client’s letter of credit.
Trade and conditions of the business. To analyze the condition of the industry. And business with which KNC deals. KCN is a company that sells and provides services like the installation of computer workstations, networking software, and hardware to business customers and other IT consulting services. IT is a very competitive industry and computer products are very sensitive to market conditions. KCN’s competitive advantage lies in its favorable geographical location and expert workforce. The company expects an annual progress yearly at the rate of 3% for the following three years, in selling IT products.
Intends to arrange meetings. To explain the meeting conducted with customers and the involvement group of CPA. A meeting has been arranged with the controller and president of the KCN and another meeting with all the members of the engagement team.
Proprietorship and managerial work. To explain about the managers and the proprietors of the organization. The proprietors of KCN are Terry Keystone, Keith Young, John Keystone, Mark Keystone, and Rita Young. Terry and Mark Keystone are active members of the management.
Objectives, Strategies, and Business Risks To describe the company’s goals, the main strategies, and the risks involved to reach the company’s objectives. KCN’s main goal is to increase its revenue and net income by 6% and 8% respectively for the next three years. The major strategies of KCN are mass advertising, sales to customers on credit, and new software development. The risks associated with the business are: a downturn in the economy, predatory pricing by the competitors and software development activities, and that advertisement expenditure may not generate effective results.
Measurement and review of financial performance To describe the methods and measures used by the management to evaluate the performance of the company. Measures used by the management of the company are inventory and receivables turnover, sales and gross margins by type of revenue, aging of accounts receivable, total inventory balance, and net income.
Processes in gaining knowledge about the customer and the Environment. To describe the procedures of auditors to understand the business environment and the client. The procedures used by auditors are: analyzing information carefully from the previous year’s audit, reading the minutes of the quarterly meetings of the board of directors, reviewing the monthly performance report of the company, reviewing industry reports, going through the official website of the company, and analyzing articles published in the Wall Street Journal.
Audit Approach To describe the various approaches undertaken by the auditor. As in the previous year’s audit, CPA will execute a test of control to evaluate the control risk.
Significant Risks To describe the risks noted by the auditors. The two significant risks identified by auditors are KCN’s strategy to sell to customers on a high credit basis and the bonus received by the officers of the company on quarterly results.
Significant Accounting and Auditing Matters To describe important matters in accounting and auditing. Significant matters to be considered are the revenue recognition method for sale extended warranties and the accounting method for evaluating the cost for the software development.
Planning Materiality To select a reasonable amount for estimating planning materiality. Considering the operating result as the basis for planning materiality, an amount of $300,000 is selected for planning materiality.
Scheduling and Staffing Plan To provide the schedule for the audit, and to plan staffing time requirements for the audit engagement. Important dates are scheduled and the procedure will start with an interim audit the last step is the issuing of the updated management letter.

6C-2 Table

The Influence of Risk Factors

KNC is involved in the plan of giving its clients credit with greater risk. The effect of the risk will be an increase in bad debts. The increase of this expense may affect the business badly. The auditors have to seek guidance, or they may hand over this case to their superior officer. The auditors have to check the creditworthiness of the company. The usual test of control measures won’t help in this situation.
The employees in the organization get a good amount as a bonus, based on its results every three months. There is a chance of misstating the quarterly results of the company to maximize its bonuses by the management. For this, the auditors must adjust the staffing engagement, add more skepticism in audit procedure or increase the collection of evidence.

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