Accounting homework help

Accounting homework help. Title: Marco Appliances Inherent Risks and Control Design Project
II. Introduction
After working as a financial accountant for several years, you decide to apply for a position you
learned about during a virtual career fair offered by UMGC’s Career Services. The most
prestigious accounting firm in the District of Columbia, Levin, Lombard, & Wolod, LLC, were
looking to hire several accountants and preferred UMGC graduates given the reputation of its
graduate accounting programs. Shortly after the virtual fair, you receive a certified letter in the
mail stating: “The Supervising Senior Auditor approved your application for an auditing position.
Please contact our Human Resources Department at 201-000-0000 to continue in the hiring
process. We look forward to having you on the Levin, Lombard, & Wolod, LLC team.”
Within a few months, the Supervising Senior Auditor (your professor) assigns you to a team
auditing Marco Appliances, Inc. The Supervising Senior Auditor calls to say “I’m assigning you
to this particular audit team because it will provide a good opportunity for you to demonstrate
your knowledge and skills on a portion of the audit process of a valued client, Marco Appliances,
Inc. a small appliance wholesaler.” You are familiar with Marco Appliances (Marco) because
your parents, who owned a retail appliance store decades ago, purchased inventory from
Marco. You recall the store’s address because it is the same as your birthday; 18 January
Lane in Annapolis, MD 21401. The Supervising Senior Auditor leads the audit teams and
makes recommendations, including structuring the parts of the audit and presenting the results
of a preliminary review to the Manager.
During the last five years, a small local CPA firm has been conducting the Marco Appliances
audit. Feeling a need for greater diversity, Marco Appliances selected your firm to conduct its
2015 audit. Marco is a small company with 50 employees including the corporate officers that
specializes in supplying a line of high-quality household appliances to residential construction
contractors in a large and growing metropolitan area. Marco has a list of customers, mostly
custom builders of single-family dwellings and some builders of single and multiple family units.
Marco’s basic marketing strategy is to ensure all inventory items are in stock and offered at
competitive prices. At the end of every quarter, Drew Black, Marco’s President, reviews product
costs and adjusts the authorized selling prices of products, as necessary. He makes the selling
price adjustments based on his assessment of how his competitors may change their pricing in
the coming year. Drew also considers his fiduciary duty to maximize shareholders’ wealth.
The 2008 global recession affected the wholesale appliance industry, which has had a slow
economic recovery but is showing signs of improvement. Before the recession, the industry’s
gross sales were growing at a real rate of approximately 7% per year, with the usual wide
variations from year to year due to fluctuations in the residential housing industry. During the
recession, Marco sales fell 15%. Fortunately, real growth rates for the industry are starting to
increase to around 3% in the current year. Marco management expects future growth in the
industry to be about the same level for the next three to five years. There is some concern that
the Marketing Manager’s marketing strategy is ineffective because Marco sales fell more than
the industry during the recession and have not grown as fast as the industry in recent years.
Marco facilities consist of a single warehouse and office building next to a railroad siding and a
major highway. Warehouse personnel simply unload rail deliveries with the forklifts and flat
trucks used to handle inventory inside the warehouse. Customers pick up all purchases at this
location; thus, the company avoids maintenance expenses on its vehicles, which would be
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incurred if Marco delivered to its customers. To further trim costs, Marco contracts with the
trucking business next door to deliver goods (FOB shipping) to some customers. All sales are
final when appliances leave the Marco loading dock for customer pick up orders and deliveries.
Marco is a privately held corporation that was incorporated in the same state in which its home
office is located. It operates in its home state and three surrounding states. Shareholders
include approximately 300 individuals and businesses. Currently, Marco’s top management
owns over 50% of the outstanding stock. The Board of Directors voted to expand operations
and is planning to go public with an initial public offering (IPO) within the next year. Executing an
IPO will require the Board to disclose historical financial information.
Marco currently provides audited financial statements to banks when seeking loans and,
therefore, has incurred audits in each of the last five years by the same accounting firm.
Because Marco is a small company, their local bank insisted on adding restrictive covenants to
the firm’s last loan agreement. These covenants include a provision that allows the bank to call
the loan immediately and in full if Marco’s current and debt to equity ratios fall below specified
levels. The covenants also set limits on the dollar amount of dividends the firm can pay.
To help stimulate sales and operating efficiency, Marco recently instituted a profit-sharing bonus
agreement for its employees, including top management. The impetus behind the profit-sharing
agreement arose because employees had gone without raises for several years. The
agreement bases employee bonuses on unaudited net income from last year to adjust
employees’ salaries at the beginning of the next year. However, management will adjust future
bonuses for any audit adjustments made after the bonuses are set, based on unaudited data.
The firm sets a bonus pool based on five percent of operating income, which limits the total
amount available to pay bonuses. Management bases individual bonuses on an employee’s
position, length of service, and certain specific negotiated terms with individual officers.
Marco’s Board of Directors includes Drew Black, its current president; Dakota Amalia, the
Controller; Harper Kim, the Secretary/Treasurer; two shareholders, each of whom own a five
percent interest in the firm; and one retired CPA, Montana Green. While there is no audit
committee, the board as a whole takes an active role in hiring and monitoring the firm’s outside
auditor. It also relies on the leadership of Mr. Washington to determine the scope of the audit
engagement. Mr. Washington was recruited to the Board last year because the prior president
and Controller retired during the year and, therefore, the current president and Controller have
been in their positions for less than one year. Management promoted the new Controller from
within, but they recruited the new president from outside the firm.
Marco selected a new auditor for this year’s audit engagement because their previous auditor
had been with the company for five years. The Board felt it was time to seek new insights into
their operations and preferred working with a more diverse audit firm. Further, they wanted to
hire a larger auditing firm with a more established reputation to support their anticipated IPO.
Table 1 lists the position and name of major stakeholders associated with Marco.
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Table 1: A summary of the major stakeholders and positions in the company
Position Name
Chairman of the Board Harley Magenta (major shareholder)
Board Member Montana Green, CPA (retired)
Board Member Mr. Washington
President Drew Black
Controller Dakota Amalia
Secretary/Treasurer Harper Kim
Accountant Stephen Violet
Bookkeeper Cooper Teal
Marketing Manager Mr. Zen
The Control Environment
Marco’s accountant prepares financial statements and various financial statistics for the officers
to review monthly. The Board reviews similar statistics quarterly at the regular Board meetings
and questions the officers about what is going on in the business. The Marketing Manager
personally follows sales figures and gross profit margins.
Supervisors interview all prospective employees for positions they supervise. At least one of
the corporate officers also interviews each prospective employee. Most of the key employees,
including the officers, have been with Marco for more than ten years. However, due to the high
demand for accountants, Marco’s accountant, and most of the accounting staff have been
employed at Marco for less than three years. While Marco checks references for any
prospective employee, they do not check criminal records or perform other forms of background
A computer network and personal computers support Marco’s accounting and inventory
management systems. Personal computers are located in the offices and warehouse, but a
central server handles all accounting and inventory files. Printers are in areas where employees
need printed documents and other records routinely. The computer is used to control and
process most transactions, to print documents, prepare accounting records, and prepare
periodic financial statements. Marco uses commercial accounting software recommended by
their auditor. To date, they have had only the usual startup problems. Marco has used the
software for two years and upgraded it once.
Marco only issues accounts and passwords to employees with jobs requiring computer data
entry or access to file information and reports. Passwords are required to enter the system.
Access is limited such that employees only have access to the information they need to perform
their duties. Access is also limited in nature such that some employees who do not have the
authority to enter data have read-only access while those whose jobs require data entry have
both read and write access. Normal access to the files takes place via the software, which
subjects any input to various logical and numerical tests. Most input is backed up by paper trails
of source documents and other business papers and the firm uses an Internet service to back
up all files to the Cloud. Marco manually runs a backup at the end of each day. They have no
other Internet presence other than an informational Website that does not allow potential
customers to order merchandise.
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Marco has a complete set of policies, procedures, and manuals that management requires
employees to use. Management is aggressive about updating the manuals and training new
employees to ensure they understand the policies and procedures that affect their duties.
Management also requires employees to attend brief review seminars on the policies and
procedures that affect their positions once a year. When hired, employees must read the
policies, including a code of conduct, and sign a statement agreeing to the policies.
Sales and Collection Processing
Sales Requisitions
Marco uses the PC network to manage inventory, sales requisitions, and sales orders. Sales
clerks who can read the perpetual inventory records via their PCs take customer orders. Most
orders originate from phone requests, but a few arrive on a walk-in basis, and some
occasionally arrive in the mail. Usually, building contractors or their representatives call to get
current price quotes and find out if specific appliances are in stock. When goods are available,
and the price is satisfactory, a sales clerk originates a sales requisition, and the process of
approving and filling it begins if customers plan to pick up their order the same day. Orders
received after 4:00 PM cannot be delivered the same day; the buyers are informed their delivery
will occur the following day. In addition, sales clerks can immediately inform a caller about outof-stock items and establish a backorder for the customer. Backorders are processed early
each day, but before they are filled, the buyers are called back to confirm that the orders are still
To originate a sales requisition, the sales clerk types the appropriate information into his or her
PC: customer number, the product(s) identification, and order quantity. The computer system
enters the customer’s name and address, and the date of the requisition automatically on all
requisitions as originated. The computer keeps track of all customer requisitions and ordering
information and prints a requisition form with today’s date on it for transmittal to the Controller.
Sales clerks cannot set up new customers in Marco’s computer system. If a new customer calls
to place an order, they are referred to the Controller, who is the only person authorized to set up
new customers in the system.
The computer updates the perpetual inventory records by flagging the items as on order as
soon as the sales clerk enters the requisition into the system to avoid over-commitment of
goods not available due to existing orders that are pending credit approval. However, this is the
only way that a sales clerk can alter the perpetual inventory records (i.e., by initiating a sales
Order Approval
Every few minutes (immediately if things are slow), one of the sales clerks hand-carries the
pending requisitions to the Controller’s office. The Controller’s secretary gives the requisitions
to the Controller, who approves them either immediately, based on first-hand knowledge of the
customer’s credit record, or after reviewing the customer’s account record on her PC. The
Controller initials the requisition to indicate approval of the sale and enters an approval for the
requisition in the accounting system.
When the Controller enters her approval code, the system creates and prints three copies of a
sales order form, assigns a sequential number to it, and moves the sales order record in the
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computer to the open sales order file. Copies one and two of the sales order are sent to the
warehouse where they are held until they can be filled. The approval copy of the requisition
form is attached to copy three of the sales orders and sent to the bookkeeper. These forms are
filed in the open sales order (physical) file for later matching with delivery advices.
The computer system notifies the sales clerk who originated the requisition when the Controller
approves or disapproves the requisition. If the customer has requested an update on the order,
the sales clerks call the customer to inform them that their orders have been approved and
delivery to their driver has been authorized. If the Controller disapproves the requisition, the
computer system reverses the perpetual inventory entry for the pending sale and removes the
record from the temporary customer order file. Sales clerks then call customers the Controller
did not approve to inform them of the situation. If they dispute the denial of credit, they are
transferred to the Controller’s telephone extension.
The sales order forms sent to the warehouse represent authorizations to deliver to the
contractors or their representatives. The warehouse supervisor assigns one warehouse clerk to
fill each order. This clerk typically retrieves each item with a forklift and brings it to the loading
dock area of the warehouse. If the receiving driver is already there, the items are loaded
directly, one at a time, until the order is complete. Otherwise, the warehouse clerk gathers all
the items and wraps a length of plastic ribbon around the ordered items to keep them separate
from other orders. If the loading area becomes congested, the clerk fills the orders only after
drivers have arrived.
After the warehouse clerk fills an order, he enters the product quantities, product number, date,
and customer number into a warehouse PC, which prints a computer dated sequentially
numbered four-copy delivery advice. The customer’s driver signs the delivery advice (all copies)
to indicate receipt of the complete order and receives the first two copies. Copy three goes into
a warehouse file in numerical order. Copy four, along with one copy of the sales order, is
delivered to the bookkeeper. The warehouse clerk’s working copy of the sales order is usually
When the bookkeeper receives a delivery advice, he matches them with the open sales orders
and reviews them for agreement in products and quantities ordered and delivered. If they
match, the bookkeeper initials the delivery advice and enters the date of delivery into the open
sales order file on the PC. The computer automatically prices the products, calculates product
amounts, totals the invoice, and calculates the cash discount, which is 2/10 net 30. The
computer then prints a sequentially numbered, four-part sales invoice and writes the specifics of
the sale to a daily-computerized sales file. The bookkeeper records the gross sales, not net.
Copies one and two of the invoice are mailed to the customer. Copy three is filed by the
customer, and copy four, along with the delivery advice, sales order, and approved sales
requisition, are filed by invoice number.
In the afternoon, the bookkeeper uses the sales recording software to access the daily sales
record, the accounts receivable subsidiary ledger file, and the sales journal file. Sales for the
day are posted at their gross amounts to the individual customer’s subsidiary accounts
receivable and to the sales journal file. The latter file is accessed monthly by the software to
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summarize sales by product and to make monthly postings to the general ledger. The
subsidiary ledger is used to review customer creditworthiness, to manage collections, and to
determine write-offs.
Collections Management and Write-offs
The Controller, whose secretary runs the software to produce an aged account receivable trial
balance by customer, manages collections. A working trial balance is generated at least once a
week and more frequently if collections lag. The Controller decides what to do about specific
accounts. Menu-driven software permits the Secretary to look up individual customer accounts,
to write off invoices or whole accounts, and to generate customer statements for invoices past
due by any specified number of days. The software also permits the printing of pre-drafted
letters to the customers to accompany any of these actions. It is standard practice for the
Controller to consider write-offs only once at the end of the month. Marco’s general policy is to
write off any invoice exceeding six months from the time of sale. However, the Controller is
authorized to make all final write-off decisions. The bookkeeper credits the allowance account if
write-offs are subsequently collected. The accounts receivable subsidiary ledger is reconciled to
the general ledger monthly.
Once each month, another software routine is used to add interest to customers’ accounts equal
to 1% of all invoices past due by 30 or more days. This routine also lists the interest charges by
invoice and by account in an interest journal, summarizes transactions for the month, and posts
the total to the interest revenue and accounts receivable accounts in the general ledger.
Sales Returns
If customers receive incorrect or damaged items, they typically call and indicate they want to
return the goods. One of the officers approves the return and notifies the warehouse to accept
the returned goods. When the customer returns the goods, a warehouse clerk completes a
receiving report. The warehouse retains one copy, the customer’s representative receives a
copy, and the bookkeeper receives a copy. The bookkeeper enters the data for the return and
the original sale into his PC. The computer records the return in an open credit memorandum
file and prints a two-copy credit memorandum. The bookkeeper sends the credit memorandum
to the Controller for approval; she then returns it to the bookkeeper. Upon receipt of the signed
credit memorandum, the bookkeeper enters the Controller’s initials into the credit memorandum
record on his PC. The computer then posts the credit to the customers’ accounts receivable and
transfers the credit memorandum information to the sales return file, from which the entries in
the Sales Returns Journal are made by the computer system monthly. Marco exchanges
defective goods with the good’s supplier for undamaged goods or, if the supplier prefers, the
damaged units are disposed of and an allowance is received on the next purchase.
Cash Receipts
The receptionist opens the mail daily, restrictively endorses all checks received and routes the
other mail to appropriate personnel. She separates the checks from the remittance advice
(copy two of Marco’s sales invoice) and sends the checks to the Secretary-treasurer, Harper
Pink, who prepares the bank deposit slip and takes the deposit to the bank. The bank deposit
form is a three-copy form. The first and second copies go to the bank with the checks and the
accountant receives the third copy.
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The receptionist forwards the remittance advices to the Accountant, who first reviews them for
appropriateness of any discounts taken and enters them into a daily cash receipts file on his
PC. After printing a listing of the remittance file and reconciling it to the deposit slip copy
provided by the Secretary/Treasurer, the Accountant runs software that posts the individual
receipts of any cash discounts to the customers’ accounts receivable and the total amount to
the cash receipts journal file. The day’s remittance advices are filed by customer number and a
copy of the deposit slip is filed by date.
Purchases and Payments Processing
Merchandise Purchases
Each morning before the first sales orders are processed, the bookkeeper runs the software
routine that combines:
1) the current perpetual inventory quantity, less items flagged as on order by customers, plus
any inventory orders in transit for each inventory item with
2) the reorder stock quantities for each item set by the Marketing Manager’s and the warehouse
When the current quantity of an item is below the reorder level, telephone price quotes for the
standard order quantity are sought from various distributors. The computer prints a sequentially
numbered, five-copy purchase order form addressed to the supplier who quoted the lowest
The computer automatically adds the quantity ordered to the inventory-in-transit files. The
inventory-in-transit will be counted in the daily reorder calculation until the goods arrive and are
included in inventory. The bookkeeper calls the supplier to place a purchase order.
Subsequently, he mails purchase order copies one and two to the supplier. Copy three of the
purchase order is filed in numerical order; copy four goes to the warehouse, with quantities
omitted, as authorization to receive goods; and copy five goes to the Accountant who places it
in an unmatched purchase order file. The following table summarizes the distribution of
purchase order copies:
PO Copy # Status
1 & 2 Mailed to the supplier
3 Filed in numerical order
4 Sent to the warehouse as authorization to receive goods
5 Sent to the Accountant who places it in an unmatched purchase order file
Receipt of Goods
All merchandise is purchased Free on Board (FOB) Marco’s railroad siding, so MARCO does
not pay the incoming freight costs nor take title to the inventory until it arrives at their railroad
siding. When merchandise arrives, the appropriate purchase order is identified by reference to
the accompanying shipping documents. Warehouse personnel count the shipment and inspect
it for exterior evidence of damage (e.g., punctures in the cartons or crates). The warehouse
only accepts undamaged goods. The warehouse clerk enters quantities received on copy four
of the purchase order and signs that copy to acknowledge receipt of the goods. Signed copies
of purchase orders are then forwarded to the Accountant as receiving advices.
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Vouching and Recording Payables for Merchandise
On receipt of signed receiving advices from the warehouse, the Accountant enters the quantities
received into the perpetual inventory file via a PC. As a byproduct, the computer purges the
purchase order from the inventory-in-transit file and produces a message indicating any
difference between the quantity ordered and the quantity received. A copy of the purchase
order is then attached to copy five in the numerical unmatched purchase order file. It is
matched with the vendor’s invoice when the latter arrives.
When the receptionist opens the mail, she forwards any vendor invoices to the Accountant, who
matches them with the unmatched purchase orders and receiving advices. If a receiving advice
is not on file for the invoice, he places it in an unmatched invoice file pending receipt of goods.
Daily, the Accountant attempts to match the open purchase orders and unmatched invoices.
When the Accountant matches an invoice with the corresponding receiving advice, he compares
quantities and prices on the purchase order and receiving advice to the vendor’s invoice and
tests the arithmetic accuracy of the invoice. He also initials the invoice to indicate that this has
been done and then keys the vendor, product quantity, price, date of receipt of goods, and
discount information into an open voucher file on the computer. The terms are customarily 2/10
net 30. The information is automatically added to the voucher register file, and a sequentially
numbered voucher is printed to control subsequent disbursement and to serve as the control
document for recording the liability and purchase. The computer software summarizes the
voucher register file monthly and posts the summary figures to the general ledger accounts.
Other software produces a trial balance of the open voucher file any time, either by due date or
by vendor. The vouchers (now with the vendor’s invoice, receiving advices, and copy five of the
purchase orders attached) are held in a physical open voucher file in due-date order. The
discount date is used unless otherwise ordered by the Secretary/Treasurer.
Non-merchandise Purchases and Services Received
The purchases of supplies and other goods are handled in exactly the same way as purchases
of merchandise with two exceptions. First, the Accountant, using software that prints the
purchase order and adds the information to the open purchase order file, originates purchase
orders for such items as a new PC. Second, all such purchases not involving capital assets are
posted to expense accounts directly. No inventory accounts are maintained for these items.
When the receptionist opens the mail, invoices for services, such as utilities, are sent to the
Secretary/Treasurer for approval. If she approves them, they become the equivalent of a
purchase order and receiving advice. The Secretary/Treasurer stamps her approval, signs, and
forwards them to the Accountant. He periodically (usually once a month) enters the data from
such items, including appropriate payment dates and terms, into the open voucher file. The
invoices and or statements are attached to the vouchers that are printed by the software
program. These voucher packages are placed in the physical open voucher file and are treated
the same as the vouchers for purchases of merchandise.
Cash Disbursements
Each morning, the Secretary-Treasurer, reviews Marco’s short-term cash situation. This
process is aided by software that summarizes the vouchers due on that day. The
Secretary/Treasurer compares the summarized amount due on that day to the available ready
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cash and a float factor based on the average daily disbursements and the average number of
days it takes for checks to clear the bank. If the cash less float exceeds the amount of vouchers
due by at least the minimum cash balance set by the Secretary/Treasurer, she authorizes the
payment of all vouchers due on that day. The Secretary/Treasurer then transfers the excess
cash from Marco’s demand account to a money market account that earns interest. If the
difference is less than the minimum cash balance set by the Secretary/Treasurer and there is
cash available above the minimum balance required in the money market account, she
authorizes payment of the vouchers due that day and transfers funds from the money market
account to Marco’s demand account.
If sufficient funds are not available in the combined demand and money market accounts, the
Secretary/Treasurer considers borrowing from the bank on the prearranged line of credit. If the
line of credit is also inadequate, which is rare, the Secretary/Treasurer confers with the
Marketing Manager. The Secretary/Treasurer and Marketing Manager generally meet at least
once a month to plan for intermediate and long-term financing needs.
After the Secretary/Treasurer authorizes the day’s payments, the approved voucher packages
are forwarded to the Controller, who compares the information to the supporting documents. If
the voucher data are accurate, the Controller initials the face of the voucher and enters an
authorization code via PC into the open voucher file. This triggers the printing of a prenumbered check and detachable remittance advice based on the data in the open voucher file.
The disbursement data are automatically transferred to the cash disbursements journal file and
purged from the open voucher file. The Controller signs the checks and forwards them to the
Marketing Manager’s Secretary.
The Marketing Manager’s secretary cancels the voucher document packages, presents the
checks to the Marketing Manager for counter signature, mails the checks to the vendors, and
returns the documents to the Accountant for filing in voucher number order.
Bank Reconciliations
Upon receipt of the bank statements each month, the Secretary/Treasurer reconciles the
beginning and ending balances and the receipts and disbursements to the book amounts. She
forwards the reconciliations to the Marketing Manager for review. He then returns them to her
for filing.
Inventory and Cost of Goods Sold
Marco maintains perpetual inventory records on each appliance. Each sale and purchase
transaction is entered in the subsidiary ledgers for the particular item sold or purchased as
described above. At the end of the month, a worksheet is prepared to cost the ending inventory
on a FIFO. The Accountant uses a software package to accomplish the costing of ending
inventory. The software is able to access both the perpetual inventory ledger and the voucher
register file. At the end of the costing routine, the software produces the journal entry to
recognize ending inventory and cost of goods sold for the month and enters the latter in the
appropriate general ledger accounts.
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III. Steps to Completion
1. Conduct Internet and library research
Do an Internet and or library search to determine the current state of the U.S. economy and the
household appliance industry. This will be the bases for your summary of possible client audit
and fraud risks that will be included in your report below. You need at least three sources of
information for the U.S. economy and industry analysis; be sure to cite your sources in your
report. You can use the most recent years for your internet search of the U.S. economy and
industry. Do not go back to the years stated in the annual report for the project.
In other words, the Marco financial statements are dated 2014 and 2015. You should conduct
your internet research on the two years preceding the year you are taking this course and
assume the Marco statements are also from the same two years. For example, if you are taking
this course in the year 202X you would conduct your research on 202X – 2 years and 202X – 1
year and also assume the Marco financial statements are dated 202X – 2 years and 202X – 1
year, whereby X could equal any digit between 0 and 9. Specifically, if this year were 2029, you
would conduct research on 2028 and 2027.
2. Prepare a client acceptance report
Prepare a client acceptance report to the partner in charge of your engagement. Use your own
words to prepare a report to the partner. There is no standard way to write a report, and there is
no template for a client acceptance report. Internal reports such as a client acceptance report
are proprietary and confidential. Information and data that would be included in a client
acceptance report will vary depending on the audit firm and the client involved. Your report will
need to contain lists of additional information the audit firm would need to gather before the
client acceptance decision is finalized.
Create a letterhead for the accounting firm where you work: Levin, Lombard, & Wolod, LLC and
use the letterhead to write your client acceptance report. Address the report to the partner in
charge of the audit (your professor). This is not a standard audit report; you may format it as a
memo to your supervisor that contains the required information and sections discussed below.
Page 97 of your Auditing textbook discusses the client acceptance process. The client
acceptance report is important because it aids in the process of evaluating whether or not to
accept a client. The report would probably be written by an audit manager and addressed to the
partner in charge of the audit, assuming the client was accepted for the audit. There are a
number of points on pages 97 through 100 that you should consider for inclusion in your client
acceptance report.
Your client acceptance report should contain the following sections:
A summary of possible client audit and fraud risks that you develop from your review of the
publicly available information on the U.S. economy and the firm’s unaudited 2015 financial
statements as well as the limited industrial data provided in the project. As a reminder, you may
use the most recent two years preceding the year you are taking this course. You must use at
least three sources of information. Cite: a) sources for the economy and industry analysis, and
b) sources in your client acceptance report.
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A description of items you recommend the audit firm research concerning Marco’s managers
that would address their ethical character and qualifications to run a firm like Marco along with a
list of possible information sources. Include a brief discussion of why you included each item by
discussing how it would affect audit and fraud risk. Include three sources of information where
you would expect to find this information. A source of information is somewhere you would look
to develop this information and can be internal information within the firm, public source, or
discussions with parties that might be familiar with Marco’s management. Cite your sources.
Provide a description of items you recommend the audit firm research concerning Marco’s
relationships with third parties including:
▪ customers,
▪ vendors,
▪ financial institutions, and
▪ legal counsel that would be relevant to assess audit risk.
Include possible sources of information for each third party and where you would expect to find
the information. Further, include a brief discussion of why you included each item by discussing
how it would affect audit and fraud risk. You must cite at least three sources of information.
A description of items you recommend the audit firm review internally to determine the need for
outside experts on the audit and whether the audit firm is sufficiently independent of Marco.
Provide a general discussion of the sources you would use here.
The grading for the report has a style component.
The text provides limited information on where to look for client acceptance information in its
discussion of the process. However, the sources are similar to those discussing inherent risk
assessment. The main difference between the two uses of the information is client
confidentiality. Once you have accepted the client, you have much greater access to
information. Before you have accepted the client, you must obtain the client’s permission to
contact third parties. Without permission, the third parties’ risk legal liability for violating Marco’s
confidentiality. Thus, your report should consider getting the client’s permission when
necessary. In addition, client acceptance decisions involve different components of the risk
model. When assessing the risk of accepting a client, you need to identify the risk component.
For example, audit risk issues involve the auditors’ risks of future litigation that do not directly
affect the risk of material misstatement. Inherent risks involve features of the firm and its
environment that will increase the risk of material misstatement.
It may be challenging to find sources detailing a client acceptance report however there are
many sources of information about a client engagement letter. Search the internet for the
information and include the same type of information that you find for a client engagement letter
in your client acceptance report.
3. Write the engagement letter
The auditors prepare the engagement letter and sign it. The auditors present the signed
engagement letter to the auditee for her/his signature. Once signed, the engagement letter
represents a contract between the two parties. More details of the engagement letter are on
Page 100 of your Auditing textbook. The engagement letter is important because it is a legally
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binding contract between the auditor and the auditee. Use the Levin, Lombard, & Wolod, LLC
letterhead and address your engagement letter to your potential client. Add need lines at the
bottom of the engagement letter for partner and client signatures and dates.
Prepare an engagement letter for Marco on the Levin, Lombard, & Wolod, LLC letterhead you
created for the Client Acceptance Report. Fill in as much of the normal sections of the letter as
possible given the information you have gathered. The engagement will only cover the financial
statements; not any additional services. You may search the Internet for sources of information
that would be included in a client engagement letter. Include some of the information that you
have included in your client acceptance report.
You can indicate the signatures and dates in a manner similar to the example following
(electronic signatures are unacceptable):
Levin, Lombard, & Wolod
By: _______________________________ Date: ______________
Auditor (Your handwritten signature)
By: ________________________________ Date: ______________
Marco Appliances, Inc.
By: ________________________________ Date: ______________
There are a number of items on pages 97 through 100 in the textbook that should be included in
your engagement letter.
4. Write the Inherent Risk and Materiality Memo
A) Preliminary Inherent Risk Assessment – Review the description of Marco Appliances, Inc.
and identify four entity-level inherent risks based on the information provided. I have listed one
potential inherent risk area as an example; you need to add four more to the list. Inherent risks
can flow from client’s business risks, the nature of its governance structure, and its strategic
plans. However, you need to be clear about how your risks create an increased risk of material
misstatement in the financial statements and not just how they might create risks of lower
operating or business performance for the firm.
Page 13 of 24
Thus, for each inherent risk, describe the feature of the firm you believe affects inherent risk and
explain how and why. By “how,” I mean whether it increases or decreases inherent risk. Make
sure your response to “how” addresses a specific risk to the accuracy of the financial
statements and whether audit effort should be increased or decreased for specific accounts or
related groups of accounts if possible.
Limit your inherent risk analysis to the following sections of the project:
a) Description of Firm and Market Conditions
b) The Control Environment (only identify issues related to inherent risk)
B) Identify risks using analytical procedures based on the financial data.
1. Perform Preliminary Analytical Procedures and Document
Review Marco Appliance’s financial statements, ratios, and industrial data presented at the end
of this document. Identify four accounts that you believe need additional audit scrutiny and
explain why. I have included one example – you need to add four more to the list. Copies of
Marco’s audited 2014 and unaudited 2015 financial statements are included after these
requirements. Some common ratios for Marco and their industry are also included.
Content/Course Resources includes the Accounting and Finance Ratios and Formulas
2. Preliminary Materiality Judgments
Set two preliminary materiality dollar amounts for the Marco audit – one for the Balance Sheet
and one for the Income Statement. Document how you calculated your materiality amounts and
explain why you chose that approach. The following resources offer guidance in making
materiality judgments: Public Company Accounting Oversight Board (PCAOB), AICPA, the
Journal of Accountancy and page 4 of the Statement of Auditing Standards Amendments to the
Description of the Concept of Materiality. You can select the materiality judgment approach you
prefer – remember you need to explain the approach that would be best for the client.
Remember the materiality level sets the level for transactions that an auditor will look at; below
that level the auditor may not look at the transaction unless there is a high risk for that particular
type of transaction.
Complete the Marco Inherent Risk and Materiality Memo Template file containing the results of
your inherent risk assessments, preliminary analytical review, and materiality level
determination. The Marco Inherent Risk and Materiality Memo Template is in Course
Resources/Projects & Rubrics.
5. Complete the Controls Template
Review the Marco project to evaluate its control environment strengths and weaknesses. For
each strength, provide a short description of the activity or feature and explain how it
strengthens the control environment. For each weakness, provide a description of the activity or
feature that you believe is a control environment weakness, an explanation of how it weakens
the control environment, and a recommended improvement. Limit your answer to three major
strengths and three major weaknesses. I have provided one example of each in the template
file; you need to add three more strengths and three more weaknesses to the table in the
template file.
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Review the company’s specific controls over sales and collections (i.e., based on the Sales and
Collection Processing section of the project) and purchases and payments (i.e., based on the
Purchasing and Payments Processing section of the project) to evaluate transaction control
Describe the control weakness (just a short statement of weakness)
Describe how the weakness could create a material error in the financial statements including
which general ledger accounts and audit objective might be affected (be clear on which
category is involved, balance, transaction, or presentation and disclosure) and provide an
explanation of how the weakness might lead to a violation of the audit objective. Make a
recommendation on how the company’s controls could be improved to mitigate this weakness
and discuss some potential weaknesses in the control you suggest (e.g., how it might be
Limit your answers to the four most serious weaknesses you find in the:
a) sales and collection processes, and the
b) purchases and payments processes.
The template file has separate sections for each step in these processes to help you structure
your answer. The four weaknesses in each of the processes can be distributed in any way
across the steps; you are not required to have a minimum number in any step.
Your control weaknesses and recommendations need to be specific to the project and sensitive
to the size of the organization. The following are some examples of recommendations that
would be inappropriate for Marco:
▪ They are too small and cannot afford to establish and internal audit department nor
contract out those services to an outside auditor.
▪ They cannot afford to make significant changes to their current computer systems and
so recommendations to computerize their current manual operations are not practical.
However, all their information is currently stored electronically and so you may suggest
simple ways they could more effectively share or control that data.
The operations of the company’s EDP environment are not completely described in the project.
Thus, your critique of the controls should be limited to those portions of their EDP environment
that are included in the project description.
Document your findings in the Marco Controls Template file. The Marco Controls Template is in
Course Resources/Projects & Rubrics.
6. Create a PDF file
Combine all deliverables into one PDF document and submit the PDF file to your assignment
folder in the LEO classroom.
IV. Deliverables
Cite all sources used to prepare your deliverables and provide a reference page at the end of
each deliverable.
Submit one PDF file to your Assignment folder in LEO that includes the following reports
Page 15 of 24
1. Client Acceptance Report
Your report should be two and three single-spaced pages using 1″ margins and 12-point
font. Include up to three suggested sources for each section of the report. The client
acceptance report is a report written by an audit manager to an audit manager – these
people would work for the same firm.
2. Engagement Letter
Your engagement letter should be between one and two single-spaced pages using 1″
margins and 12-point font. An engagement letter is written by the partner of the audit
firm to the potential audit client – these people work for two separate firms. You must
sign the engagement letter.
3. Inherent Risk and Materiality Memo
Complete the Inherent Risk and Materiality Memo Template provided in Course
Resources/Projects & Rubrics
4. Evaluation of Controls
Complete the Controls Template provided in Course Resources/Projects & Rubric
5. Reference list
Prepare a Reference list of sources used to prepare the final deliverable. The reference
list must be in APA format. The APA provides guidance on preparing a reference list:
V. Rubric:
Review the rubric before you begin this project to ensure you know You will find the rubric in
LEO under Contents>Course Resources>Projects & Rubrics/Project 2 Rubric.
VII. Helpful hints:
Guidance to enhance your final deliverables:
▪ Read the grading rubric before starting this project to ensure you know what is required
and how each deliverable will be graded.
▪ Write the deliverables in your own words and note that all graduate accounting writing
assessments are automatically submitted to, which generates a similarity
score. To avoid a high similarity score, per APA requirements, cite all sources you used
to write the deliverables for this project.
• You can find APA Style resources in Content/Course Resources/Writing
• Also, the American Psychological Association (APA) offers excellent free learning
resources at:
• is another excellent resource for learning how to avoid plagiarism.
▪ Consider incorporating feedback you receive from family and friends you asked to read
your deliverables.
Page 16 of 24
▪ Submit your documents to the graduate writing tutors at least 1 week before the project
due date. This free resource can be accessed in your LEO classroom. Make edits to
your deliverables after reviewing feedback from the writing center tutors.
▪ Submit all required files on or before the due date.
• If relevant, review the Departmental Late Policy, which is in syllabus and is
strictly enforced. Note: no assignments are accepted after the last day of class.
Page 17 of 24
Appendix Page
Appendix A: Balance Sheet 17
Appendix B: Income Statement 19
Appendix C: Financial Ratios 21
Appendix D: Comparative Balance Sheets for the Wholesale Heating and AC
Appendix E: Comparative Income Statements for the Wholesale Heating and
AC Industry
Page 18 of 24
Appendix A: Balance Sheet
Marco Appliances, Inc.
Balance Sheets
(U.S. Dollars)
Current Assets 2018 2019
2018 %
2019 %
Assets % Change
Cash and cash
equivalents $ 22,045 $ 10,867 1.94 0.79 (50.71)
Money market funds 31,510 16,000 2.78 1.16 (49.22)
Accounts receivable 301,713 425,755 26.60 30.83 41.11
Allowance for doubtful
accounts (31,916) (33,779)
(2.45) (5.84)
Inventory 307,701 503,091 27.13 36.43 63.50
Total Current Assets 631,053 921,934 55.65 66.76 46.09
Property and
Plant $ 625,000 $ 625,000 $ 55.11 $ 45.26
depreciation – plant (220,000) (240,000) (19.40) (17.38) (9.09)
Equipment 120,000 120,000 10.58 8.69
depreciation – equipment (72,000) (96,000)
(6.95) (33.33)
Land 50,000 50,000 4.41 3.62 –
Net Property and
Equipment 503,000 459,000 44.35 33.24 (8.75)
Total Assets $ 1,134,053 $ 1,380,934 100 100 21.77
Page 19 of 24
Liabilities and Stockholders’ Equity
Current Liabilities
Accounts payable 145,031 387,757 12.79 28.08 167.36
Payroll taxes payable 8,524 17,436 0.75 1.26 104.55
Income taxes payable 30,235 4,125 2.67 0.30 (86.36)
Dividends payable 14,197 3,203 1.25 0.23 (77.44)
Total Current
Liabilities 197,987 412,521 17.46 29.87 108.36
Notes payable 215,000 185,000 18.96 13.40 (13.95)
Total Long-term
Liabilities 215,000 185,000 18.96 13.40 (13.95)
Stockholders’ Equity
Capital stock 300,000 300,000 26.45 21.72
Paid-in capital 100,000 100,000 8.82 7.24
Retained earnings 321,066 383,413 28.31 27.76 19.42
Total Stockholders’
Equity 721,066 783,413 63.58 56.73 8.65
Total Liabilities and
Equity $ 1,134,053 $ 1,380,934 100 100 21.77
Page 20 of 24
Appendix B: Income Statement
Marco Appliances, Inc.
Income Statements
(U.S. Dollars)
2018 2019 2018 2019
Sales $ 2,756,561 $ 3,307,873
100.00 20.00
Sales discounts (8,371) (9,207)
(0.28) (9.99)
Sales returns (33,809) (51,559)
(1.56) (52.50)
Bad debt expenses (27,565) (33,078)
(1.00) (20.00)
Net Sales 2,686,816 3,214,029
97.16 19.62
Cost of goods sold 2,159,042 2,601,646
78.65 20.50
Gross margin 527,774 612,383
18.51 16.03
Salaries expense $ 259,287 $ 290,400
8.78 12.00
Payroll tax expense 18,434 21,199
0.64 15.00
Fringe benefits 14,357 16,081
0.49 12.01
Rent 6,491 7,140
0.22 10.00
Utilities 21,943 25,673
0.78 17.00
Insurance 6,149 6,456
0.20 4.99
Supplies expense 3,067 3,650
0.11 19.01
Postage expense 974 1,140
0.03 17.04
Advertising expense 4,636 5,100
0.15 10.01
Professional fees 11,386 11,500
0.35 1.00
Miscellaneous 980 1,225
0.04 25.00
Purchase discounts lost 42,374 53,815
1.63 27.00
Page 21 of 24
Interest expense 9,215 12,164
0.37 32.00
Depreciation expense 44,000 44,000
1.33 –
Total operating
expenses 443,293 499,543
15.10 12.69
Operating Income 84,481 112,840
3.41 33.57
Interest revenue 22,864 28,580
0.86 25.00
Income before income
taxes 107,345 141,420
4.28 31.74
Income taxes 25,114 37,508
1.13 49.35
Net Income $ 82,231 $ 103,912
3.14 26.37
Beginning retained
earnings $ 271,728 $ 321,067
Net income 82,231 103,912
Dividends (32,892) (41,565)
Ending retained earnings $ 321,067 $ 383,414
Page 22 of 24
Appendix C: Financial Ratios
Marco Appliances, Inc.
Financial Ratios
(Amounts in U.S. Dollars)
2018 2019
Operating Performance
Overall Performance
Return on Assets 7.3% 7.5%
Return on Equity 11.4% 13.3%
Asset Turnover 2.4 2.4
Cash Conversion Cycle
Days cash in receivables 40.0 47.0
Days cash in inventories 52.0 70.6
Days needs 92.0 117.6
Days cash in payables and accrued liabilities 23.0 50.8
Net conversion cycle 69.0 66.8
Financial Position
Current Ratio 3.19 2.23
Quick Ratio 1.79 1.10
Dividend payout 92.6%
Total debt to equity 0.57 0.76
Long-term debt to equity 0.30 0.24
Effective Tax Rate 23.4% 26.5%
Page 23 of 24
Appendix D: Wholesale Heating and AC Industry
Comparative Balance Sheet Percentages
12/31/2018 12/31/2019
% of Assets % of Assets
Cash and Equivalents 5.00 4.50
Accounts Receivable (net) 35.00 37.00
Inventory 40.00 39.00
Other Current Assets 1.50 1.40
Total Current Assets 81.50 81.90
Fixed Assets (net) 17.50 17.00
Intangible Assets (net) 1.00 1.10
Other Non-Current Assets 18.50 18.10
Total Assets 100.00 100.00
Accounts Payable 28.50 30.50
Short-term Loan Payables 13.50 14.00
Income Taxes Payable 2.00 2.20
Other Current Liabilities 1.40 1.30
Total Current Liabilities 45.40 48.00
Long-term Debt 8.90 8.50
Net Worth 45.70 43.50
Total Liabilities and Net Worth 100.00 100.00
Page 24 of 24
Appendix E: Wholesale Heating and AC Industry
Comparative Income Statement Percentages
Net Sales 100.00 100.00
Cost of Goods Sold 79.00 79.50
Gross Margin 21.00 20.50
Total Expenses 16.50 17.00
Income before Taxes 4.50 3.50
Asset Turnover 2.60 2.55
Return on Assets 6.20% 5.90%
Current Ratio 1.80 1.71
Quick Ratio 0.88 0.86
Total Debt to Equity 1.19 1.30
Long-term Debt to Equity 0.19 0.20

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