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Audit Planning
Student Name
Institutional Affiliation
Abstract
An audit planning for the audit of Keystone Computers & Network, Inc. (KCN) financial statements is vital because it guarantees various stakeholders that the firm complies with state laws, accounting and auditing standards. In the case of KCN, numerous accounting issues should be addressed as a way of making the books of accounts credible and relevant to users. Similarly, audit plan helps audit staff to comprehend the working environment; thus, enhancing effectiveness of the audit. For instance, auditors should be given an opportunity by the management to learn a few things about the company activities in the previous year. This move helps audit staff to identify challenges and propose potential solutions. Largely, stakeholders of KCN should be given an opportunity to look at the auditor report, which confirms whether the financial statements symbolize a true and fair view of the company financial health. The audit deficiencies should be addressed to ensure that mistakes identified will not be repeated in the present fiscal period.
Keywords: Audit Plan; Audit Report; Financial Auditing Standards; Generally Acceptable Accounting Principles
Audit Planning
An audit plan for Keystone Computers & Networks Inc. focuses on identifying whether KCN financial statements exemplify a true and fair view. This practice is crucial for KCN because it will ensure that potential problems are identified, and favorable solutions provided.

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As such, the audit report prepared will function as an assurance that the financial information presented is relevant and credible to be used in making sound investment decisions. Intuitively, this audit plan will help the auditor and the organization staff understand their roles in accomplishing the audit process objectives.
LO 3: Explaining Key Sections of the Audit Plan
Section Purpose Content
Objectives of Engagement To help KCN staff and auditors understand their responsibilities in completing various auditing activities. The audit goals comprise;
Appraising KCN financial statements for the accounting period ended 12/31/20X5.
Assessment of KCN creditworthiness by appraising its ability to honor debt agreements.
Business and industry conditions To describe KCN competitiveness as well as core competencies that the company shows. The auditor seeks to explain sources of the company competitiveness, which may include the following:
Sale of high quality goods and services.
Development of new products.
Increased staff expertise.
Ability to retain and motivate workers to perform excellently.
Planning Meetings To meet with KCN audit representatives to agree about the best time to complete various auditing functions. The main item of discussion during the first meeting consist:
(1) Agreeing with client about the audit date for the year 20X5.
Ownership and Management To identify and describe KCN Inc. owners. The goal of this section is to describe who are the stakeholders, and their role in running the firm daily operations.
Objectives, Strategies, and Business Risks To describe potential risks that the firm faced in the previous financial period, and measures that need to be adopted in future. The objectives of this segment will be achieved using three approaches:
Evaluating KCN strategies to market its products, sale of goods in credit, and development of new commodities.
Describing the key business risks; potential economic downturns, unhealthy competition, increased operation costs, credit losses, and ineffective innovation strategies.
Highlight ways to deal with the risks stated in (2) above. The main responses to these hazards comprises: careful assessment of the US economy, improved monitoring of rival actions, efficient management of accounts receivable, increased research budget and hiring a competent marketing team.
Review and Measurement of Financial Performance To explain the main measures used by KCN management to evaluate performance. The objective of this section will be to describe whether the management succeeded in using the following measures:
Receivable and inventory turnover rations.
Ageing of KCN accounts receivables.
Gross margins and sales ratios.
Net income assessment.
Total inventory balance.
Procedure to Obtain an Understanding of the Customer and Business Environment To show the steps the auditor used to enhance understanding about the client as well as various market dynamics. The main goals are;
Evaluation of the previous year audit report or documents.
Communicate with the management.
Read in advance the quarterly board reports, most preferably the one for January through July.
Monitor KCN monthly performance.
Review the industry reports, especially those that address issues such as consulting and IT.
Assess KCN online platforms, mainly the firm website.
Review editorials from other sources, The Wall Street Journal.
LO 3, 4: Significant Risks
Risk Implications and Responses
KCN engaged in a scheme to sell to clients with greater credit risk. The implications of this risk involve:
Increased bad debts considering that a larger number of customers lacks the ability or do not have the ability to pay their obligations.
Reduced business income, which condenses the ability KCN to finance its operations. The sale revenue is very crucial for every business; thus, there should be less credit sales unless customers have higher ability to pay their debts (Udeh, 2015).
KCN will not be able to pay its obligations on time. This fact may make the company lose its reputation after failing to pay up its debt on time.
Significant responses to this risks may comprise:
Communicate with the customers to understand when they intend to pay the debts.
Making a follow up to ensure that in case the clients are liquidated, KCN gets a share of the assets.
Working closely with the authority to ensure all debtors are kept on check. This move can help reduce malicious defaulting of debts by the clients.
A change in credit selling strategy can also play an instrumental role in preventing this peril.
KCN officers receiving significant or greater bonuses based on quarterly results. These are the implications of KCN officers receiving greater bonuses:
Reduced business liquidity since money earned on a quarterly basis is shared among the few stakeholders; therefore, leaving the company with unsubstantial finances to sponsor its day-to-day business activities (Udeh, 2015).
Slowing business growth taking into consideration that the money available for reinvestment is shared among the firm officers.
Some of the responses to this risk include:
Adoption of a strategy that allows company officers to receive their bonuses at the end of the accounting period.
Reducing the percentage of the income shared among the officers. This move can increase the finances available for reinvestment and running daily business operations.
LO 7: Significant Auditing and Accounting Matters
Short Memorandum
“The practice of capitalizing costs associated with developing a software follows the accounting principle of matching concept. This concept helps to match expenses with revenues. In this case, KCN can capitalize costs related to materials and services consumed in the process of developing the software. In addition, the company should record payroll costs as an expense since human resources play an instrumental role in the software development process. Finally, KCN can capitalize post-implementation and interest cost (Udeh, 2015). The most effective accounting method for this type of costs is selective capitalization technique because it helps in recognizing or capitalizing the costs when incurred. This method ensures that dynamics such as software marketability, feasibility and usefulness are put into consideration. In the case of KCN Inc., development costs are treated as intangible assets since they are generated internally.”
Major audit issue in the accounting of development cost
One of the major auditing issue involving accounting for software development cost is the strategy used by the management to recognize and capitalize this type of expenses. Many costs have similar features, and this makes it difficult for the management to make sound decision concerning software development costs. The duty of an auditor in KCN would be to weigh whether the costs included in the financial statements are associated with the software development (De Martinis, Fukukawa & Mock, 2011). In addition, it would be imperative for an auditor to assess whether development costs disclosed in the financial statements correlate with the accounting period for the audit. This move help address the problem of compliance to accounting rules; for instance, Financial Auditing Standards Board (FASB) and the Generally Accepted Accounting Principles (GAAPs). This audit concern would help the management understand whether there was a need to amortize the software or undertaking other asset management practices.
LO 3, 4: Analytical Ratios
Financial ratios
Ratio Ending
12/31/X5 Ending
12/31/X4 Industry
Current Ratio 1.2 1.2 1.3
Days’ Sales in accounts receivable, computed with average accounts 32.6 33.2 37.0
Allowance for doubtful accounts/accounts receivable 0.01% 1.1% _
Bad debts/net sales 0.001% 0.2% –
Total liabilities/net worth 8.73 2.7 2.9
Return on total assets 8.3% 8.3% 9.0%
Return on net worth 8.32% 30.5% 29.0%
Return on net sales 1.77% 1.0% 2.3%
Gross profit/net sales 23.15% 23.2% 24.0%
Selling, operating, and administrative expense/net sales 5.05% 21.4% 23.9%
Time interest earned 4.1 4.1 5.5
Ratios review
The financial ratios for the year ended 20X5 indicate that the company performance has improved to some extent as compared to 20X4 fiscal period. For instance, the current ratio for KCN remained constant, which shows that the company management is committed to make the entity profitable. The days in sale measure indicate that the company is effective in selling its product (Sweeney & McGarry, 2011). It can be noted that this ratio is lower as opposed to that of the fiscal year 20X4 and industry average. Mainly, the financial statement accounts that need to investigated include account receivables and administrative expense account.
Reasons for investigating financial statements accounts
The account receivables should be investigated in depth to ensure that the management made the right decision concerning allowances to bad debt. Some of the significant risks highlighted seeks to describe the customers’ ability to pay the company. If the management did not make the sound decision about this issue, the account should be corrected. On the other side, the administrative expense account should be investigated considering that the stakeholders have been awarding themselves huge bonuses (Sweeney & McGarry, 2011). This practice has put KCN at risk, since a business is viewed as a separate entity. In simple terms, failure to assess any deficiencies can affect the company as a going concern as well as tainting KCN image in the technology market.
Conclusion
An audit planning exercise provides auditors with an opportunity to understand the client based on management and market environment. The audit planning process is crucial to ensure that the auditing process, a mandatory accounting process, is carried out effectively. In addition, this practice ensures that audit staff observe and get to understand their roles. In the case of KCN, this process enables the auditor to create a rapport with the management and agree on the terms of works. With an audit plan, individuals can understand the objective of auditing in a particular company. To ensure that KCN complies with states laws and account rules, an audit should be conducted at the end of each financial period.
References
De Martinis, M., Fukukawa, H., & Mock, T. J. (2011). Exploring the role of country and client type on the auditor’s client risk assessments and audit planning decisions. Managerial Auditing Journal, 26(7), 543-565. doi:http://dx.doi.org/10.1108/02686901111151305
Sweeney, B., & McGarry, C. (2011). Commercial and professional audit goals: Inculcation of audit seniors. International Journal of Auditing, 15(3), 316-332. doi:http://dx.doi.org/10.1111/j.1099-1123.2011.00437.x
Udeh, I. A. (2015). Audit budget potentials. Review of Business, 36(1), 35-42. Retrieved from https://search.proquest.com/docview/1732271532?accountid=45049

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