Beta Home Goods 2 Consolidated Statement of Income (Audited) December 31, 2018 4 5 Net Sales...

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Beta Home Goods 2 Consolidated Statement of Income (Audited) December 31, 2018 4 5 Net Sales 6 Cost of Sales 7 Gross Prof 8 SOA Expenses 9 Operating Income 10 Interest Expense 11 Income Before Taxes 12 Income Tax Provision 13 Net Income 14 $1,841,922 1.085,060 756,862 694,742 15 Basic EPS 16 17 *Credit sales are equal to 93% of net sales 18 19 Materiality 20 21 22 23 62,120 1.305 60,816 12,771 48.045 $0.48 3,040.80 C D Current Assets Cash and Equivalents Accounts Receivable, net Inventory Prepaid Expenses Total Current Assets Total Assets Assets Long Term Assets Property and Equipment, net Long-Term Investments Total Long-Term Assets E Beta Home Goods Consolidated Balance Sheet (Audited) December 31, 2018 $589,415 943,064 5,728,378 1.763,530 9,024.387 $1,678,654 1.594,721 3.273.376 $12,297,762.48 Current Liabilities Accounts Payable Accred Liabilities Liabilities & Stockholders' Equity Income Taxes Payable Total Current Liabilities Notes Payable Total Liabilities Stockholders' Equity Common Stock, 100,000 shares issued & outstanding Additional Paid-in-Capital Accolated Other Comprehensive Income Retained Earnings Total Stockholders' Equity Total Liabilities & Stockholders' Equity H $1,367,443 1,736,653 95.721 3.199.817 Part 2 (10 points): Inherent Risk (IR) Assessment. Use the summary information on p.2 and ratio analyses of last year's financial statements to answer these questions. $3,555,352 6,755.168 2019 Audit of Beta Industries: Summary Information Assume you are an audit manager, today is May 15, 2019, and your public accounting firm is currently planning the 2019 financial statement audit of Beta Home Goods, a retailer in the home goods and supply industry. Beta is a public company with a 12/31 year-end, and a new client for your firm. The audit partner has asked you to help plan the audit for this new client using the following information obtained and summarized by the engagement team, and the ratios you will calculate in the multiple choice questions below: • CEO. Sofia Ortega is Beta's CEO and chairperson of the company's board of directors. She has been in this position for six years, and previously served as the CEO of a smaller company in the same industry. Her background prior to these top-level executive positions was in lower levels of management at the smaller competitor. • CFO. Michael Barkley, CPA, is Beta's CFO and a former auditor. He has worked at Beta in various accounting and financial reporting positions for nearly two decades, and has been CFO for six years • • • Accounting for investment securities. A material portion of Beta's investments is classified as Level 3 assets. Your helpful audit senior reminded you that if you do not remember asset classification from your financial accounting courses, a quick web search for Level 3 assets should help you determine if these investment securities are relatively easy or difficult to value Allowance for doubtful accounts. An inquiry conducted by the audit senior revealed that Beta has decreased the percentage of credit sales used to calculate the allowance from 7% of credit sales last year to 3% in 2019. The industry average is 6%. The CFO said they made the change because of a projected increase in days outstanding in receivables for 2019 compared to last year. $800,000 3,040,000 Executive Compensation. In the past, 10% of executive compensation was through a base salary, with 90% dependent on whether the company meets its Basic EPS forecast. Beta has changed the mix this year such that 60% is base salary, with 40% dependent on meeting the basic EPS forecast. 13. List four issues from the summary information on p.2 that could impact IR at Beta 1) A material portion of Beta's investments are Level 3 assets 2) Allowance for bad debts was reduced, when risk of bad debt is high 3) Multiple mergers which can lead to complicated transactions 4) Eric Wall may present a conflict of interest with a close family member owning significant control in the company being audited 14. Summarize the information from the predecessor auditor. How does this information impact overall IR? Explain your answer. 1) The predecessor auditor is no longer performing auditing services, so they can provide consulting services. This seems reasonable because they couldn't have done this prior to switching their services. 15. What is your assessment of inherent risk for Beta's allowance for doubtful accounts (low, moderate, or high)? Explain your answer. 1) IR would be set high because their receivable turnover suggests that accounts are paid very late. Upon initial inspection, it would look like the allowance should've been set higher than what they are claiming. 16. What is your overall IR assessment (low, moderate, or high)? Support your conclusion using the summary information in this document and the 2018 financial statements, including the analytical procedures you performed in Part 1. 700,272 1,002,322 5.542.594 $12,297,762.48 • Acquisitions. Last month, Beta completed the acquisition of a competitor, and plans to complete a second acquisition later this year. Your audit team believes it is very likely the second acquisition will be completed by the end of this year. Collectively, the acquisitions will double Beta's assets compared to last year (neither of the acquired companies are the previous employer of Beta's CEO). 1) Overall IR should be set High because the a board member is also the CEO of the company. Executive compensation is now based on EPS, which can be manipulated to boost compensation. Beta's investment portfolio is also comprised of level 3 assets which are difficult to value. The company is also going through 2 acquisitions by the end of the year. • Predecessor Auditor. Beta received unqualified opinions from its predecessor auditor for the past ten years. Beta switched auditors because the company wants its predecessor auditor to provide consulting services. The predecessor auditor agrees that this is the reason for the change in auditors. • 2018 Audited Financial Statements. See the accompanying Excel file. • Regulatory Environment. Your andit team does not expect significant changes in regulations for Beta's industry this year. The industry is not heavily regulated • Engagement Staffing. Eric Wall, a new staff auditor at your firm who was just assigned to the Beta audit, told you that his sister owns a material (to her) amount of Beta's common stock. Eric does not believe this impairs his independence and has requested to stay on the audit Beta Home Goods 2 Consolidated Statement of Income (Audited) December 31, 2018 4 5 Net Sales 6 Cost of Sales 7 Gross Prof 8 SOA Expenses 9 Operating Income 10 Interest Expense 11 Income Before Taxes 12 Income Tax Provision 13 Net Income 14 $1,841,922 1.085,060 756,862 694,742 15 Basic EPS 16 17 *Credit sales are equal to 93% of net sales 18 19 Materiality 20 21 22 23 62,120 1.305 60,816 12,771 48.045 $0.48 3,040.80 C D Current Assets Cash and Equivalents Accounts Receivable, net Inventory Prepaid Expenses Total Current Assets Total Assets Assets Long Term Assets Property and Equipment, net Long-Term Investments Total Long-Term Assets E Beta Home Goods Consolidated Balance Sheet (Audited) December 31, 2018 $589,415 943,064 5,728,378 1.763,530 9,024.387 $1,678,654 1.594,721 3.273.376 $12,297,762.48 Current Liabilities Accounts Payable Accred Liabilities Liabilities & Stockholders' Equity Income Taxes Payable Total Current Liabilities Notes Payable Total Liabilities Stockholders' Equity Common Stock, 100,000 shares issued & outstanding Additional Paid-in-Capital Accolated Other Comprehensive Income Retained Earnings Total Stockholders' Equity Total Liabilities & Stockholders' Equity H $1,367,443 1,736,653 95.721 3.199.817 Part 2 (10 points): Inherent Risk (IR) Assessment. Use the summary information on p.2 and ratio analyses of last year's financial statements to answer these questions. $3,555,352 6,755.168 2019 Audit of Beta Industries: Summary Information Assume you are an audit manager, today is May 15, 2019, and your public accounting firm is currently planning the 2019 financial statement audit of Beta Home Goods, a retailer in the home goods and supply industry. Beta is a public company with a 12/31 year-end, and a new client for your firm. The audit partner has asked you to help plan the audit for this new client using the following information obtained and summarized by the engagement team, and the ratios you will calculate in the multiple choice questions below: • CEO. Sofia Ortega is Beta's CEO and chairperson of the company's board of directors. She has been in this position for six years, and previously served as the CEO of a smaller company in the same industry. Her background prior to these top-level executive positions was in lower levels of management at the smaller competitor. • CFO. Michael Barkley, CPA, is Beta's CFO and a former auditor. He has worked at Beta in various accounting and financial reporting positions for nearly two decades, and has been CFO for six years • • • Accounting for investment securities. A material portion of Beta's investments is classified as Level 3 assets. Your helpful audit senior reminded you that if you do not remember asset classification from your financial accounting courses, a quick web search for Level 3 assets should help you determine if these investment securities are relatively easy or difficult to value Allowance for doubtful accounts. An inquiry conducted by the audit senior revealed that Beta has decreased the percentage of credit sales used to calculate the allowance from 7% of credit sales last year to 3% in 2019. The industry average is 6%. The CFO said they made the change because of a projected increase in days outstanding in receivables for 2019 compared to last year. $800,000 3,040,000 Executive Compensation. In the past, 10% of executive compensation was through a base salary, with 90% dependent on whether the company meets its Basic EPS forecast. Beta has changed the mix this year such that 60% is base salary, with 40% dependent on meeting the basic EPS forecast. 13. List four issues from the summary information on p.2 that could impact IR at Beta 1) A material portion of Beta's investments are Level 3 assets 2) Allowance for bad debts was reduced, when risk of bad debt is high 3) Multiple mergers which can lead to complicated transactions 4) Eric Wall may present a conflict of interest with a close family member owning significant control in the company being audited 14. Summarize the information from the predecessor auditor. How does this information impact overall IR? Explain your answer. 1) The predecessor auditor is no longer performing auditing services, so they can provide consulting services. This seems reasonable because they couldn't have done this prior to switching their services. 15. What is your assessment of inherent risk for Beta's allowance for doubtful accounts (low, moderate, or high)? Explain your answer. 1) IR would be set high because their receivable turnover suggests that accounts are paid very late. Upon initial inspection, it would look like the allowance should've been set higher than what they are claiming. 16. What is your overall IR assessment (low, moderate, or high)? Support your conclusion using the summary information in this document and the 2018 financial statements, including the analytical procedures you performed in Part 1. 700,272 1,002,322 5.542.594 $12,297,762.48 • Acquisitions. Last month, Beta completed the acquisition of a competitor, and plans to complete a second acquisition later this year. Your audit team believes it is very likely the second acquisition will be completed by the end of this year. Collectively, the acquisitions will double Beta's assets compared to last year (neither of the acquired companies are the previous employer of Beta's CEO). 1) Overall IR should be set High because the a board member is also the CEO of the company. Executive compensation is now based on EPS, which can be manipulated to boost compensation. Beta's investment portfolio is also comprised of level 3 assets which are difficult to value. The company is also going through 2 acquisitions by the end of the year. • Predecessor Auditor. Beta received unqualified opinions from its predecessor auditor for the past ten years. Beta switched auditors because the company wants its predecessor auditor to provide consulting services. The predecessor auditor agrees that this is the reason for the change in auditors. • 2018 Audited Financial Statements. See the accompanying Excel file. • Regulatory Environment. Your andit team does not expect significant changes in regulations for Beta's industry this year. The industry is not heavily regulated • Engagement Staffing. Eric Wall, a new staff auditor at your firm who was just assigned to the Beta audit, told you that his sister owns a material (to her) amount of Beta's common stock. Eric does not believe this impairs his independence and has requested to stay on the audit

Answer rating: 100% (QA)

13 List four issues from the summary information on p2 that could impact IR at Beta 1 Executive Compensation The change in executive compensation where 60 is based on meeting basic EPS forecast could ... View the full answer