Traber Electronics is a small privately owned retailer of electronic equipment and household appliances. Traber Electronics is required to provide audited financial statements as part of a due diligence investigation in consideration of a potential acquisition of Traber by a public company. In the interest of time, Traber appointed the audit firm of Makins & Howell, CPAs, without a formal proposal process. Makins & Howell immediately accepted the audit engagement in early October and agreed to the November 1st deadline for the auditor’s report.
Katie Kammins, CPA, was recently promoted to in-charge auditor for Makins & Howell and was assigned to the Traber audit along with Joel Misten, the firm’s university intern. Prior to her assignment to the Traber audit, all of Katie’s audit experience was in the healthcare industry. Because most of Katie’s healthcare clients had June 30th year-ends, Katie was available in October to work on the Traber engagement.
Katie and Joel got right to work. Katie informed Joel that there was no time to test controls, so she instructed him as to the proper procedures for proving the mathematical accuracy of the accounting journals and ledgers and tying the totals to the financial statements. There were no footnotes or other supplemental disclosures accompanying the financial statements and there were no prior year financial statements to be used as a basis of comparison, which helped expedite the audit process.
While Joel was busy with the mathematical tie-ins, Katie analyzed the company’s sales and inventories, as these were the most significant revenue and asset accounts. For sales, Katie reviewed the monthly sales reports and learned that there were several large contracts that had been accounted for on the percentage of completion method. Although she wasn’t sure about the propriety of the profits recognized, Katie held a series of discussion with Traber’s controller, who assured Katie that the profits had been recorded in accordance with generally accepted accounting principles.
For inventories, Katie observed the items in the retail store, noting the reasonableness of their descriptions and saleable condition. She did not examine the inventory at the company’s warehouse, as it represented less than half of the value of the asset account.
One week before the deadline, Makins & Howell provided their standard audit report, which included an unqualified opinion on Traber’s financial statements.
Refer to each of the ten generally accepted auditing standards and indicate how the actions of Makins & Howell and/or its associates resulted in violations of these standards.