Audit Procedures and Internal Control Evaluation for Smackey Dog Foods, Inc.

Name: Audit Procedures and Internal Control Evaluation for Smackey Dog Foods, Inc.
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Author: Michael Davis

Case study of audit methodology and internal control assessment in a pet food company

Michael Davis

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Audit Procedures and Internal Control Evaluation for Smackey Dog Foods,
Inc.
Q1: Discuss how the SEC has influence (if any) over the audit of Smackey Dog Foods, Inc.
Smackey Dog Foods, Inc. is a privately owned company and is not subject to SEC regulations.
However, their accounting standards and financial statements must be in conformity with GAAP.
During the first stage of the audit, I did research on the dog food industry to better familiarize
myself with the risks currently associated with this industry, such as current economic conditions
and how they have affected this industry, competition, and the audit procedures that are usually
involved in the audit of this type of business.
Smackey Dog Foods, Inc. is a small cap privately owned organization in Chicago area. The
company was started by the group of sisters. Currently, the organization has grown and is
looking towards expanding their business into vertically in various demographics with more
economic growth. The company currently manufactures two kinds of dog food, their
conventional regular dog food that they started the company with, and their Best Boy Gourmet
dog food line which is packaged fresh and served in only single eating pouches. The bank they
are getting the loan for expansion wants audited statements of the company for sanctioning the
loan amount. In such situation, the company has hired Keller CPA’s to do a complete audit of
the company.
Q2: Discuss the essential activities involved in the initial planning of an audit. How do these
all specifically to the Smackey Dog Food client?
Smackey is at risk of a material misstatement within their inventory due to internal controls in
regards to their returns process. This raises a red flag to the auditors that special attention needs
to be paid when reviewing the inventory and warehouse cycles. Also, there is no segregation of

duties for Henry, the employee who monitors the production and shipments. He is involved in
every part of the operation of making, sending, and receiving inventory and raw materials. Thus,
those records need to be audited and tested for accuracy to ensure that the inventory records
match the shipping and receiving documents by completing substantive tests of transactions in
this area. The other area with questionable internal controls is the accounts receivable. Since the
accounts receivable will be used as collateral for the business loan Smackey Dog Food is
applying for, the risk of misstatement in this area is very high and will need to have a larger
number of tests and evidence. One other area of focus for internal controls that the audit team
should test is the property, plant and equipment accounts to ensure that the balances are correctly
stated (Porter, 2008). The audit team needs to run tests to ensure that transactions are correctly
recorded as assets in repairs and maintenance expense, lease expense, supplies, small tools, and
similar accounts.
Q3: Discuss the 4 stages of the audit and the major activities performed by the auditor in
each phase. Give an example of how each of these specifically applies to the Smackey Dog
Food, Inc audit. For instance, examine the apparent internal control weaknesses and
possible negative outcome of each.
The audit team must perform analytical procedures and tests of balances specifically on their
accounts receivables and allowance for bad debt. Since Smackey is on the market for a loan to
expand their business, then they may be at risk of overstating their accounts receivable by not
recording their bad debt allowance. The biggest vendor Smackey has, Pup Stores, Co., is
currently facing a lawsuit from an animal rights group. Because of the legal fees involved in the
suit, their cash reserves are depleted and are having to look at closing some stores. Since they

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Auditing

Audit Procedures and Internal Control Evaluation for Smackey Dog Foods, Inc.

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