Define the auditable entity. Describe the business model of the entire entity. How does the entity receive resources?

Find a commercial auditable entity (a company, other organization, or part

of one). You may not use an organization which is not a for-profit entity.

You may not use a church, synagogue, mosque, nor other religious entity.

2. Define the auditable entity.

3. Describe the business model of the entire entity. How does the entity

receive resources? How does the entity earn a profit? Merely saying that

it sells something does not tell how it earns a profit; I could set up a

business selling dollar bills for five cents each, and I might sell a lot of

dollar bills, but I would not earn a profit from this business.

For example, if it is a for-profit business, how does it attract customers?

Are its customers buying staple goods, convenience goods, shopping

goods, or luxury goods? Explain why these are staple goods,

convenience goods, shopping goods, or luxury goods. You should have

learned these terms in your first marketing course. (If you were to audit

such a not-for-profit organization in the future, after graduation, does it

receive funds through contributions, member dues, contracts to provide

social services, etc.?)

4. If the auditable entity is less than the entire entity, how does the auditable

entity fit into the entire entity? If the auditable entity is the entire entity,

say so.

5. What is the particularized (not general) professional literature which an

auditor should be aware of, if applicable? Do not include the material in

the standards and related rules or general audit manual, but do include

particular FASB statements (SFAS’s), ASB statements, industry audit

guides available from the AICPA, applicable standards from the GASB,

regulatory accounting requirements, etc. which apply to this client. Two

good sources to use to check for such professional literature are the

AICPA (www.aicpa.org) and a related store (www.cpa2biz.com). Also

check any professional literature we have at this educational institution,

including in electronic form.

6. Track down and read the COSO (Council of Sponsoring Organizations)

document on risk. (Note to students: The Department of Accounting has

been successful during the past two to three years in obtaining a site

license to various authoritative professional literature. If we are able to do

so again this academic year, check to see whether the COSO literature is

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included.) Tell whether you read the document. Whether or not you

actually read the document, tell what you did to try to find the document.

7. What are the most important business risks to the client entity

associated with this entire entity and with this auditable entity? (Think of

business risks to the client entity as things which could go wrong, or other

things which could have a significant negative effect on the client’s

business.)

8. What are the most important business risks to the audit firm associated

with this entire entity and with this auditable entity? (Think of business

risks to the audit firm as things which could happen that would somehow

taint the reputation of the audit firm, even though the audit firm did its work

correctly and rendered the correct report.)

9. What are the most important audit risks associated with this entire entity

and with this auditable entity? If you were actually doing a financialstatement

audit of the entity, what would you do to assure that you could

gather sufficient appropriate audit evidence to formulate the proper

opinion on the financial statements of this entity? (Think of audit risks as

those things peculiar to the client and to the auditable entity which might

make the auditors think they had done a good job which supports an

unqualified opinion when in fact the opinion should be qualified,

disclaimed, or adverse.)

10. Prepare a report to be presented to the teacher, the class, and possibly to

some guests. Do not full justify your report; left justify, which leaves a

ragged right edge. The report should include at least:

a. Define the auditable entity.

b. Explain the type of entity (small retail store, stand-alone franchise

unit of a restaurant chain, hotel owned and operated by a chain,

manufacturer of pink left-handed widgets, etc.).

c. If the auditable entity is less than the entire entity, how does it fit

into the entire entity? What decisions does it make locally, and

what decisions are made at some upper level?

d. What is the particularized (not general) professional literature which

an auditor should be aware of, if applicable? Do not include the

material in the standards and related rules or general audit manual,

but do include particular FASB statements (SFAS’s), ASB

statements, industry audit guides available from the AICPA,

applicable standards from the GASB, regulatory accounting

requirements, etc. which apply to this client. Two good sources to

use to check for such professional literature are the AICPA

(www.aicpa.org) and a related store (www.cpa2biz.com). Also

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check any professional literature we have at this educational

institution, including in electronic form.

e. Tell whether you read the COSO (Council of Sponsoring

Organizations) document on risk. Whether or not you actually read

the document, tell what you did to try to find the document.

f. Are customers of the auditable entity buying staple goods,

convenience goods, shopping goods, or luxury goods? What

evidence or persuasive argument do you present in support of this?

g. What is the business model of the overall entity? (In other words,

how does the company earn a profit?) Note that saying the

company sells some products or services tells little or nothing about

how it earns a profit. Someone can sell genuine U.S. dollar bills for

five cents each, and sell lots of dollar bills, but he will not make a

profit.

h. What are the business risks to the client particular to this entity,

whether they are due to industry, company size, or other factors?

(example: The company is in the telecommunications industry,

which presently is plagued by overcapacity. This puts pressure on

both the quantity of business it can obtain and on the price it can

charge to its customers. It may therefore be difficult to perform a

test concerning whether the company is likely to continue in

business for one year beyond the date of the financial statements.)

i. What are the business risks to the auditor associated with

accepting an engagement to do an audit of this entity? (example:

The prior auditors state that there were no disagreements over

accounting principles nor proposed audit adjustments with the

company’s management, but they increased their fee quotation by

45% from the preceding fiscal year. This may be an indication that

there are undisclosed problems related to this company.)

j. What are the audit risks associated with this entity, whether they be

due to industry, company size, or other factors? (example: The

company is very small, so it probably has poor internal controls

related to segregation of duties.)

k. Properly cite the sources of information used, and properly quote

when material is quoted.

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