This simulation presents an audit request list document for materials requested of management that has been prepared by an audit team staff member for the Keystone audit. Because this simulation addresses material presented in Chapters 10-13 (plus other general knowledge concerning auditing), we include it here. Note, however, that the information obtained through such an audit request list would be obtained very early in the audit.

The CPA firm Adams, Barnes & Company is preparing for the year 20X5 audit of Keystone Computers & Networks Incorporated (KCN), a calendar year-end nonissuer. An audit staff member started with the 20X4 year audit request list for KCN and updated it as he thought appropriate.

Required:

Your job as senior on the engagement is to review and revise the year 20X5 request list for KCN as needed.For each of the sentences called out in the points on the document, determine if the current language is appropriate as is, should be removed altogether, or replaced with any of the provided alternatives. Ensure that the 20X5 list is appropriate given the information provided. The materiality for the year 20X5 audit has been set at $300,000. Links to each of the exhibits are provided in the document, but are available in the list below for convenience.

Exhibit 1 - Excel SpreadsheetKCN Working Trial Balance

Exhibit 2 - Memo to Files

Exhibit 3 - Forwarded Email from Controller to Partner

Exhibit 4 - Email from Audit Manager to Audit Partner

Document

(For each Document Callout, choose the correct Determination from the table below.)

Keystone Computers & Networks, Inc.

Year Ended December 31, 20X5

Audit Request List (Draft 1)

Please have the materials listed below ready for when we arrive on site. Unless a different date is specifically stated, these documents should be as of and for the year ended December 31, year 20X5.

• Final working trial balance
• Bank reconciliations for June and December, year 20X5.
• Bank statements for December, year 20X5 and January, year 20X6.
• Trial balance of accounts receivable.
• Accounts receivable summarized by date of most recent purchase. (Callout #1)
• Property, plant, and equipment roll-forward of changes during the year.
• Furniture and fixtures purchase documentation.
• Sales of the Plumtree small business accounting system by month.
• Invoices supporting depreciation expense for the year. (Callout #2)
• Software development cost invoices and other support. (Callout #3)
• Support relevant to the amortization of the software development cost.
• Vouchers supporting increase in leasehold improvements. (Callout #4)
• Detailed analysis and reconciliation of each unpaid account payable at year-end. (Callout #5)
• Inventory detail by category (finished goods, WIP, raw materials).
• Documentation supporting change in capital stock outstanding. (Callout #6)
• Quarterly board of directors meeting minutes.
• Management's review of receivables from officers. (Callout #7)
• Prepaid expenses analysis.
• Accrued expenses analysis.
• Supporting documents for dividends paid.
• Account 7140.10 expense analysis. (Callout #8)

Exhibit 4

E-mail from Audit Manager to Audit Partner

TO:	Charles Adams, KCN, Partner
FROM:	Karen West, Manager
SUBJECT:	KCN Allowance for Doubtful Accounts
DATE:	December 29, 20X5

I spoke with Wilbur Wood, manager of collections.

Although KCN does not yet have its final working trial balance, it seems at this point that the allowance for bad debts will go from $96,000 in 20X4 to $104,000 in 20X5.

During the year, the Willay Co. receivable for $208,234 was written off completely due to Willay's bankruptcy and the fact that the expected amount recoverable on the account is zero.

In addition, he said that he had pointed out and discussed with the controller three accounts totaling a bit less than $32,000 that may not be collectible.

Given the level of accounts receivable, we definitely need to consider the adequacy of the allowance for bad debts.

Exhibit 3

Forwarded E-mail from Controller to Partner

TO:	Sam Best, Partner
FROM:	Loren Steele, Controller, KCN
SUBJECT:	RE: Software Development
DATE:	November 5, 20X5

FYI Loren

---------

E-mail

TO:	Loren Steele, Controller
FROM:	Sam Best, President
SUBJECT:	Software Development
DATE:	August 12, 20X5

As you know, we have spent significant amounts on software development. Although we are at an early stage here, let's make sure that we capitalize these costs ($178,000) because, ultimately, we may be able to develop software that not only do we use, but so do our customers. These expenditures could lead to greatly enhanced sales after a year or two.

Sam

PS: Did I tell you that, even though the rent on our building is going up, the new lease doesn't require a payment for the first three months? At least that's good.

Exhibit 2

Memo to Files: Upcoming Keystone Computers & Networks Incorporated (KCN) Audit

Charles Adams, Partner

November 5, 20X5

Mr. Loren Steele, controller of Keystone computers, joined me for lunch today. While this was an informal get together, we did speak some about the coming audit.

• He suggested that he would appreciate it if we could get together our audit request list of the various documents and other materials that we would like them to prepare for the audit as soon as possible.
• Keystone has hired a number of outstanding young employees with particularly strong IT skills.
• The year-end 20X3 purchase of Plumbtree Systems, a small business accounting system, is not working out as well as they had hoped as sales are slow. Recently the software was rated poorly by a trade association journal and it has been suggested that it is somewhat dated. Mr. Steele indicated that while the intangible asset account related to it was amortized $200,000 in 20X4 (based on a six-year amortization period), the firm would have to "come to grips" with whether to write off more than $200,000 this year. His thought was that it might well be necessary to write off half or more of the remaining $1,000,000 this year. He stated that on top of that, KCN total earnings so far this year were down about 40 percent as compared to the end of the third quarter last year.
• He indicated to me that he would forward details related to the software development costs the company started capitalizing this year. After lunch he forwarded an e-mail from Mr. Sam Best, President, to him on this. See Exhibit 3.
• There will be an increase in the accounts receivable from officers as President Best asked for and obtained a loan from the companythis is a loan agreement Mr. Steele signed with the company, not a simple receivable. Because its amount was slightly below the amount necessary for Board of Directors approval, the matter was not addressed by the Board.
• Finally, on a more personal level, he told me that his wife had recently inherited a large sum of cash and they were in the enviable position of investing it. They recently bought a large, distinguished, old house in Jerome, AZ, that they will use as a "vacation" home. He invited my wife and me to come visit them some weekend.

Exhibit 1 KCN Working Trial Balance

	12/31/X4	12/31/X5 (unaudjusted)
Debit	Credit	Debit	Credit
1000.10	CashGeneral account	42,754		66,034
1000.20	CashSpecial account	9,960		10,150
1000.30	Cash in register	1,200		1,200
1000.40	Petty cash	50		50
1050.10	Accounts receivabletrade	8,534,524		10,235,457
1050.40	Accounts receivableofficers	57,643		84,670
1040.90	Allowance for bad debts		96,000		104,000
1100.10	Inventories	1,234,589		1,375,835
1300.10	Prepaid expenses	156,900		176,456
2050.10	Furniture & fixtures	300,980		344,900
2050.30	Office equipment	789,654		974,676
2050.80	Leasehold improvements	98,900		98,900
2050.85	Amortization of leasehold improvements				7,670
2050.90	Accumulated depreciation		250,987		404,560
2100.00	Software development cost			178,000
2200.00	Intangible assets	1,000,000		800,000
3050.10	Accounts payabletrade		1,349,839		1,429,033
3100.00	Capital lease obligationscurrent		43,200		45,675
3210.10	Accrued liabilities		178,900		203,450
3300.30	Unearned service revenue				42,300
3400.50	Line of credit		6,612,550		8,632,105
4400.10	Capital lease obligationsnoncurrent		456,700		423,680
5050.10	Capital stock		200,000		200,000
5100.10	Paid-in capital		423,500		423,500
5700.10	Retained earnings		1,626,203		2,615,478
5900.00	Dividends			415,000
6000.10	Sales of computers		44,890,788		42,345,675
6010.10	Software licenses		248,900		236,700
6020.10	Service revenue		4,567,888		4,325,777
6030.10	Consulting revenue		46,751,990		45,677,899
7020.10	Cost of sales	74,122,435		72,134,566
7070.10	Salariessales	3,167,889		2,765,677
7070.50	Payroll benefitssales	913,456		857,368
7075.10	Advertising & promotion	1,200,786		1,567,889
7080.10	Travel & entertainment	609,788		445,600
7080.30	Miscellaneous expensesales	334,890		278,656
7090.10	Salariesoperations	4,878,900		4,544,860
7090.30	Salariesadministrative	4,234,234		3,945,670
7090.50	Payroll benefitsadministrative	1,812,344		1,734,565
7100.10	Rent	797,800		721,345
7140.10	Utilities	210,495		234,839
7200.10	Insurance	356,890		378,677
7260.30	Legal & accounting	457,577		485,767
7320.10	Bad debt expense	234,500		256,678
7410.10	Supplies	556,345		478,900
7600.10	Depreciation and amortization	334,565		367,867
7650.10	Software development cost	289,100		345,645
7700.10	Miscellaneous expenseadministrative	234,556		245,456
7800.10	Interest expense	421,344		476,899
7900.10	Current income taxes	256,765		80,100
7900.70	Deferred income taxes	45,632		9,150
	107,697,445	107,697,445	107,117,502	107,117,502