Audit Decision Case Case Study 1: King Companies, Inc.

King Companies, Inc. (KCI) is a private company that owns five auto parts stores in urban Los Angeles, California. KCI has expanded from two auto parts stores to five stores in the last three years, and it plans continued growth. Eric and Patricia King own the majority of the shares in KCI. Eric is the chairman of the board of directors and CEO of KCI, and Patricia is a director as well as the CFO. Shares not owned by Eric and Patricia are owned by friends and family who helped the Kings get started (Eric started the company with one store after working in an auto parts store). To date, Eric has funded growth from an inheritance and investments from a few friends. Eric and Patricia are thinking about expanding by opening three to five additional stores in the next few years. In October 2024, Eric approached your accounting firm, Thornson & Danforth, LLP, to conduct an annual audit of KCI for the year ended December 31, 2025. KCI has not been audited before, but this year the audit has been requested by the companys bank because of anticipated bank loans and by a new private equity investor that has just acquired a 20% share of KCI.

KCI employs 20 full-time staff. These workers are employed in store management, sales, parts delivery, and accounting. About 40% of KCIs business is retail walk-in business, and the other 60% is regular customers where KCI delivers parts to their locations and bills these customers on account. During peak periods, KCI also uses part-time workers. Eric is focused on growing revenues. Patricia trusts the companys workers to work hard for the company, and she feels they should be rewarded well. The accounting staff, in particular, is very loyal to the company. Eric tells you that the accounting staff enjoys their jobs so much they have never taken any annual vacations, and hardly any workers ever take sick leave.

There are two people currently employed as accounting staff, the most senior of whom is Jonathan Jung. Jonathan heads the accounting department and reports directly to Patricia. He is in his late fifties and hopes to retire in two or three years and move away from Los Angeles. Jonathan keeps a close watch on accounting and does many activities himself, including opening mail, cash receipts and vendor payments, depositing funds received, performing reconciliations, posting journals, and performing the payroll function. The second employee, Abby Owens, is a recent college graduate who just passed the CPA exam. Abby is responsible for the payroll functions and posting all journal entries into the accounting system. Jonathan and Abby often help each other out in busy periods.

Chapter 4 focus on LO 1, 3: Gaining an understanding of a new client. You have access to the following information for KCI: 1. Prior period financial statements. 2. Budgets for the current year. 3. Industry comparisons.

REQUIREMENTS: Based on the information above that you would gain access to, plan and present the types of analytical procedures the audit team will use to gain an understanding of KCI. Note from your Instructor: You wont actually review items 1, 2 and 3 above. You will prepare your presentation knowing that is what you would have access to, in addition to the information about King provided above. As part of the risk assessment process, you were asked for input on suggested analytical procedures for the audit. Your presentation should be prepared as if you were a new staff on the engagement. AT A MINIMUM, you should address at least one analytical procedure to be performed for each of the items 1, 2, and 3.