Management changed the inventory accounting from first in, first out (FIFO) to last in, first out (LIFO) and did not accurately revalue the inventory. The lead auditor was the cousin of Bovar Company’s chief financial officer (CFO).The American Institute of Certified Public Accountants (AICPA) professional standards provide uniform wording and format for the audit report. Consider the below events in the transaction cycle and write a 1-page audit report for Harrison that includes all 7 parts of a standard audit report, as follows:
Audit report address
Name of the Certified Public Accountant (CPA) firm
Audit report date
Over the past year, it has been determined that there may be some control issues in each of the major transaction cycles. The following is a chart of each cycle with the areas of concern identified.
Transaction CyclesAreas of ConcernThe procurement and payment cycle There were 4,000 purchase orders that totaled $55 M for raw material. There is concern that not all purchases were completed using formal purchase orders, receipts did not match payment authorizations, and purchase orders were missing. The capital acquisition and repayment cycle Two capital projects totaling $2.5 M may have been overspent by $600,000 and may not reflect the reported capital spending. The sales and cash receipt cycle There were 15,000 invoices totaling $122 M in sales. Unauthorized discounts applied to invoices, credit terms applied to invoices may be incorrect, and unaccounted for invoice sequence numbering may be present. The accounting for inventory There were 6,000 stock keeping units (SKUs) that totaled $22 M. Physical inventories reported inventory losses of $300,000.
At the end of the audit, the audit team completed the fieldwork and signed the auditor report on March 20, 2014. Harrison sold some of assets in the rectangular heat exchangers line on March 31, 2014. The team is concerned about this event transaction occurring after December 31, 2013 that may affect the 2013 financial statements. Discuss the following questions in a 1-page document:
What general types of subsequent events require consideration and evaluation by the management and the audit team?
Describe the financial statement effect of the subsequent event that is described above.