TERM PAPER – Spring 2020 – ECW, Inc.
As the syllabus states – 15% of your grade is based upon a short term paper
INFORMATION NEEDED FOR YOUR PAPER:
You have graduated and are now working on the audit staff for a large accounting firm. You are assigned to your first engagement – the audit of ECW, Inc.’s financial statements for the year ended December 31, 2019. ECW, Inc. –a non-public company –manufactures those slide turner clicker devices. In September 2019, you are in a planning meeting with the engagement team – you, the Partner, manager, the senior and another staff person that has one more year experience than you.
At the planning meeting, you learn the following facts from the Partner and manager:
FEE AND RELATED BUDGET:
For the past three years, the fee your Firm charged the client for the audit was as follows –
Audit of 2016 financial statements- $100,000
Audit of 2017 financial statements– $110,000
Audit of 2018 financial statements- $115,000
Those fees were based on your Firm’s current billing rates based upon the amount of hours charged to the engagement. The fee charged the client was always within the range of fees quoted in your Firm’s engagement letter. (For example, last year the engagement letter said, ‘We estimate that our fee will range between $110,000 and $120,000.’) This year, Evan Wasserman has looked into possibly changing CPA firms since he believes your Firm’s fees are too high. Evan told the Partner and manager that he is seriously thinking about changing firms. The Partner and manager met with Evan last week and promised that your Firm’s fee for the audit of the 2019 financial statements will be based on your Firm’s current billing rates and hours charged, but the fees will NOT EXCEED $110,000.
The manager tells the engagement team that he and the Partner have discussed the “not to exceed fee.” The Partner is aware that billing rates in the Firm have increased 5%, and has told the manager that he expects the actual billed time (billable hours * hourly rate) spent on the engagement should not exceed $117,000 ($7,000 more than the maximum that can be billed to the client). The Firm is aware that it has to keep Evan happy so he does not change firms and your Firm is willing to remain competitive; hence the reduced fee. The manager tells you he is preparing a budget that does not exceed $117,000. Both the Partner and the manager tell you they want everyone to try to adhere to the budget that the manager created. (Note: A budget will outline how many hours it is expected for completion of a certain task—like auditing cash –30 hours, or reviewing notes to financial statements –7 hours. The hours and responsibilities for each engagement team member will be listed and then multiplied by that member’s hourly billing rate)
INTERNAL CONTROL:
When the Partner and manager met with the client, Evan admitted that for all previous years, your Firm had determined that internal controls over financial reporting were weak. In the past, your Firm had communicated significant deficiencies and material weaknesses in writing to management of ECW, Inc. and ECW, Inc. never corrected any deficiencies in internal control over financial reporting. But beginning January 2019, Evan has told the Partner and manager that all deficiencies were corrected.
OTHER ITEMS DISCUSSED:
The Partner also informed the team that ECW, Inc. is now being sued by Clicker, Inc. Clicker, Inc. claims that ECW, Inc. has infringed on its patent and Clicker Inc. is seeking $10,000,000 in damages. The litigation is in its early stages, and ECW, Inc. believes it did nothing wrong and plans to defend itself.
In addition – the Partner said he recently met Evan’s twin brother Eric. Eric told the Partner that Eric owns 4 office supplies stores. Eric’s company (EHW Office Supply Stores, Inc.) has a September year end and EHW Stationary Stores, Inc.’s financial statements have never been audited. Through August 31, 2019, ECW, Inc. has sold $5,000,000 worth of clickers to EHW Office Supply Stores, Inc. As of August 31, 2019, ECW, Inc. has an Account Receivable from EHW Office Supply Stores, Inc. of $2,000,000.
Evan has informed the Partner and manager that he is looking for a new bank. His current bank will only provide a maximum credit line of $2,000,000 and Evan is looking for a bank to provide ECW, Inc. a credit line of $4,000,000 to possibly expand ECW, Inc.’s product lines. The new bank has seen the unaudited financial statements of ECW, Inc. through August 2019 which shows a current ratio of 2.02 to 1 and a net income of $1,000,000. Accounts receivable, which will be collateral for the new loan, is $5,000,000 at August 31, 2019 The new bank has told Evan that the Bank will require that ECW, Inc.’s annual financial statements reflect a current ratio of not less than 2 to 1 and a net income of not less than $1,250,000 in order for the Bank to approve the new loan.
Other information based on ECW, Inc.’s financial statements as of August 31, 2019:
Net income before taxes — $1,500,000
Total assets — $20,000,000
Total revenues $20,000,000
Total equity — $7,000,000
The above is what the Partner and manager has informed the engagement team at the planning meeting. Here are some additional facts that all participants at the meeting were aware of before the meeting:
Some additional facts:
Last year’s audit strategy was to do only substantive procedures.
In the past, Management of ECW, Inc. has shown integrity
ECW, Inc. has a good accounting staff. The staff is the same in 2019 as 2018, 2017, and 2016.
ECW, Inc.’s accounting staff prepares all schedules (workpapers) supporting the account balances on the financial statements. ECW, Inc.’s staff also prepares the financial statements and related notes to financial statements. Your Firm just audits them. (Your Firm does not have to prepare supporting schedules or prepare the financial statements)
There has not been any material proposed adjusting entries to the financial statements in the last three years.
ECW, Inc. provides all documentation you ask for on a timely basis. You do not have to search ECW, Inc.’s files for anything.
ECW, Inc. does not have internal auditors (so do not discuss this in the paper)
An unmodified opinion was issued on 2018, 2017, and 2016 financial statements.
There was substantial information put in the permanent file workpapers each year.
Narratives and walkthroughs were used to document ECW, Inc.’s accounting system (with significant deficiencies in internal control) in prior years.
The day after the planning meeting, the manager has ANOTHER meeting with the engagement team without the Partner present. The manager tells the rest of you that his promotion to partner depends on the engagement team adhering to the budget so the amount charged on the billing run (Actual hours x hourly rate) does not far exceed the maximum fee allowed to be charged to the client
YOUR PAPER TOPIC– Based on the facts discussed above, what are some issues that should concern YOU and the rest of the audit team, and how should YOU and the rest of the audit team address these issues.
In addition, how might you and other members of the audit team react to the second meeting between the engagement team and the manager?
Also, the manager asks your opinion (as a learning experience) to tell the team what you believe the planning materiality for the overall financial statements should be.
Your thoughts should include points (that we learned in class thus far) RELATED TO THE ALL OF THE ABOVE FACTS. Your thoughts should address the audit plan, the effectiveness and efficiency of the audit, the report on the financial statements, note disclosures, and ethics (AND RELATED SAFEGUARDS). ONLY USE INFORMATION WE HAVE LEARNED FROM CHAPTERS 1 THRU 7 AND CHAPTER 17. DO NOT INCLUDE INFORMATION FROM ANY OTHER CHAPTERS. DO NOT DISCUSS SPECIFIC AUDIT PROCEDURES THAT WE HAVE NOT LEARNED IN CHAPTERS 1 THRU 7 AND 17) (Note –I do not want procedures related to certain accounts on the financial statements (for instance accounts receivable) since we did not learn about that yet). But your discussions should only relate TO THE INFORMATION PROVIDED ABOVE. (NOTE –Do NOT list all things that would be discussed at a planning meeting or in a planning memorandum. I ONLY WANT YOU TO DISCUSS THINGS THAT ARE RELEVANT TO KEY INFORMATION RELATED TO ECW, INC. THAT I PROVIDED TO YOU. (For example – do not discuss planning to observe the physical inventory since I provided NO information related to inventory). Only address the key items discussed above that should concern YOU and the audit team.)
By the way –do not state in your paper that your Firm can increase the fixed fee. IT IS NOT AN OPTION.
INSTRUCTIONS:
Use Arial 11 font – double spaced- one inch margins
The paper should be a maximum of 6 pages. I have not set a minimum but I have made a RUBRIC and I am looking for certain points to be mentioned in the paper.
Just start the paper with the Heading “PLANNING MEETING – ECW, INC. — AUDIT OF FINANCIAL STATEMENTS FOR YEAR ENDED DECEMBER 31, 2019. Then begin with points discussed at the meeting – There is no reason to have an opening paragraph introducing the topic – I KNOW WHAT THE TOPIC IS. You will not be given credit for a “fancy” opening paragraph that just reiterates the topic.
The paper should be posted to Blackboard (Go to Assignments, click on View/Complete link, then upload file) no later than Friday April 17, 2020 at 11:59PM. You have adequate advance notice to plan your time. THERE WILL BE NO EXTENSIONS.
PLEASE UPLOAD YOUR COMPLETED ASSIGNMENT THRU THIS BLACKBOARD SITE.
If it is late –you will lose 2% of your grade for every HOUR it is late.
We have learned a great deal about auditing thus far based on chapters 1,2,3,4,5,6,7, 17.
You may use what we learned in class to write the paper and use the textbook—BUT YOU CANNOT USE THE INTERNET OR ANY OTHER SOURCES. If you use the internet, I will know because you will be including information that I know you will not think of yourself. You are to brainstorm with your partner. (I would prefer call on phone so you can discuss at same time, but you can use google docs or similar software.) Do this together – pretend you are in the same room discussing your thoughts. That is how it is done in real life – bouncing ideas off of each other. Do not ask anyone else who may have written a similar paper since that student probably used the internet and came up with some information that you would not think of yourself. Besides, this topic has never been used before. Believe me, I will have an idea that a “buzz word” is not yours. If you did not think of a word or phrase on your own, you better not use it. DO NOT READ ANYONE ELSE’S PAPER FOR ANY IDEAS. THIS SHOULD BE YOUR OWN WORK. Your grade will be substantially reduced (perhaps down to a zero) if you use a source that is not yours.