Scenariosmackey Dog Foods Incscenario Summarysmackey Dog Foo

Scenariosmackey Dog Foods Incscenario Summarysmackey Dog Foods Inc

Scenariosmackey Dog Foods Inc—Scenario Summary Smackey Dog Foods Inc. started in the kitchen of Sarah, Kim, and Jillian’s family home in the suburbs of Chicago. The three sisters initially bought the ingredients for their natural dog food recipes from the local grocery store. They used their dogs and the neighborhood dogs as their taste testers. Their dog food products were so good, the local kennels and veterinary offices were glad to distribute the sisters' products to their customers. Local demand increased significantly.

Local pet stores and small grocery stores discovered the products and became distributors. The sisters moved the expanding business into a larger facility and hired a few more workers. Although their competitors’ sales were flat or declining, Smackey Dog Food Inc.’s sales were on a vertical climb! Sales were so good last year that the sisters opened a boutique division named Best Boy Gourmet, specializing in freshly manufactured, one-serving packages meant for consumption no later than 3 days after production. They sell this product at three times the cost of their other products and by special order only through their new website.

Demand is high, but waste has been an issue. Sarah is the president and general manager of the operation. Sarah has been very proactive in growing the business. She has met with her banker to discuss expanding the facilities and equipment with another $150,000 loan. Their first loan for $150,000 was secured by the industrial-size food production equipment purchased with the loan.

The banker now demands an audit of the corporate financial statements before releasing another loan to the company. Sarah has offered to place the corporate account receivables up as collateral to secure the second loan. Based on revenue projections by her sister Jillian’s sales team, Sarah believes that the company will not have trouble paying down the loan in a short period of time. Kim manages the production operations. She oversees the inventory, production, and shipment of dog food products.

The Best Boy Gourmet line has taken almost all of her attention lately. The winter holidays are approaching, and sales demand based on forecasts from the sales force are higher than ever. Attaining fresh, raw ingredients is more difficult in the winter months. If any of the fresh ingredients are delayed, production comes to a standstill. There has been significant inventory waste as a result.

Kim’s assistant, Henry, monitors the production and shipment of Smackey Dog Food’s regular line of product. Henry takes pride in his work and is involved in every facet of the operation. With only one other warehouse employee to help, Henry personally is involved in preparing and approving all inventory records. Henry ensures that very little finished inventory sits in the warehouse. However, the shipping dock always seems to be full of returned dog food that should be restocked.

When Kim asks him about it, Henry laughs and tells her that "first in, first out" applies to dog food returns as well. Kim smiles and just accepts that answer. Jillian is not very good at understanding accounting. The sisters placed Jillian in charge of sales. She manages a sales team of 12 salesmen in Illinois, Indiana, and Wisconsin.

Her fear of flying and poor driving skills limit her ability to get around to the areas outside of Chicago. As a result, she has placed a lot of faith in her sales team. The sales team complained last year that they did not like waiting for their commissions until after bookkeeping calculated the actual revenues. In order to keep their spirits fired up, Jillian has her salespeople project what their sales will be in the upcoming quarter, and she pays commissions in advance on those projections. The sales team loves her, and Jillian loves their approval.

Jillian has noticed that the projections typically are off by 11% on average. The employees of Smackey Dog Food Inc. all own dogs. It was a hiring requirement on the job application. One employee was fired when it was discovered she never owned a dog when she was hired. A lawsuit is pending by the fired employee.

At this time, the receivables represent 29% of the corporate assets. The Chicago retail chain Pup Stores Co. is Smackey Dog Food’s largest buyer. It alone represents 31% of overall sales and usually pays within 30 days. However, Pup Stores is facing a major lawsuit from an animal rights group. The legal fees are eating into the company's cash reserves, and it is facing some store closures.

The accounts receivable aging indicates that 38% of the receivables are 30 days or less. Twenty-two percent are 31–60 days. Twenty-one percent of the receivables are 61–90 days old. Ten percent are 90–120 days. The remaining receivables are older than 120 days. Sarah has not written off any of the receivables, nor will she. Sales are projected to steadily grow at 16% next year if the company does not expand its facilities. With the expansion, sales are projected to rise 26%, with the most significant jump in the last quarter after expansion is completed and holiday sales pick up.

Your Role You and your firm, Keller CPAs, have never audited a dog food manufacturer. Although it is late in the year to be accepting a new calendar-year-end audit, you need the work and have the time to devote to the audit before your 2-week ski vacation in February.

You begin the audit process just prior to year-end by sending your audit manager, Pete, and two audit staffers, Ben and Maureen, out to the client. They spend time assessing the client and planning the audit. During the first month of field work after year-end, Ben and Maureen note that the dog food bags piled high on the docks are marked “Returned.” One employee is seen throwing bags of the premium Best Boy Gourmet dog food into the dumpster in the morning and pulling it out and throwing it into Henry’s car during the employee lunch hour. Pete’s new best friend, Alan, was married to Smackey Dog Food Inc.’s owner, Kim, 4 years ago. Alan is also good friends with the banker from whom Sarah is seeking the loan.

KEY PLAYERS

Back to Top YOU DECIDE

Assignment Assignment Required : During our course, each of you will prepare one short (five to seven pages, double-spaced) paper based on the Smackey Dog Food Inc. case facts above. The purpose of the project is to move you beyond the black letter into the actual practical application of legal principles in real-life situations. The project case is due at any point before the end of Week 7.

It serves to highlight the importance of audit opinions and reports. This project gives you an opportunity to conduct certain audit procedures and determine the course of action regarding the audit. Note : You are being graded on analyzing issues you identify in the project case, in addition to responding to the questions listed in the YD_Activity (see link below) Use the YD_Activity document to answer the questions related to this scenario. GOALS AND OBJECTIVES EVALUATION 2 Goals and Objectives Evaluation for Silvon Memorial Hospital Victoria Rice TAMMY MCCREARY HSM/240 JULY 19, 2015 Introduction A goal is a principle set by organizations to guide them in decision making (Zainub & Wall, 2013).

Paper For Above instruction

In this paper, I will analyze the case of Smackey Dog Foods Inc., focusing on key audit issues, potential risks, and the appropriate procedures an auditor should undertake given the scenario described. The case presents a variety of concerns ranging from financial misstatement risks, internal control weaknesses, related-party relationships, and operational challenges. By examining these issues, I will highlight the importance of professional skepticism, due diligence, and adherence to auditing standards in ensuring an accurate and compliant audit opinion.

One of the foremost issues is the treatment of inventory, especially the high volume of returned dog food marked “Returned” and found in the warehouse. The practice of employees tossing returned dog food into dumpsters and Henry’s involvement in removing and re-stocking returned items suggest potential inventory misstatement or misappropriation. Because returned inventory is critical to collecting accurate costs of goods sold and valuation of inventory, it is essential that auditors verify the existence, completeness, and valuation of inventory through physical counts, observation, and testing of internal controls. This ensures inventory is accurately recorded and not inflated or understated, which directly impacts gross profit and net income figures.

The case also raises concerns regarding the valuation and timing of revenue recognition. Jillian’s practice of projecting sales and paying commissions in advance based on future projections and estimates introduces a risk of revenue overstatement. Auditors need to evaluate whether the revenue recognized aligns with the applicable accounting standards (e.g., GAAP), especially considering the aggressive growth projections (16-26%) and the potential for premature revenue recognition to meet targets.

Further, the significant accounts receivable balance, constituting 29% of assets, warrants detailed review. The aging analysis shows a substantial proportion of receivables (approximately 61%) are overdue beyond 30 days, with 10% aging past 90 days. The company's policy of not writing off uncollectible receivables, even when they are significantly overdue, could result in inflated assets and accounts receivable balances. The pending lawsuit against Pup Stores Co., the largest customer, further complicates collectability and necessitates a comprehensive evaluation of the allowance for doubtful accounts. This involves reviewing the aging schedule, correspondence with the customer, and assessing whether a reserve adjustment is necessary.

The related-party relationship between Pete, the audit manager, and Alan, who is connected to Kim (the owner), poses an independence concern. Since Pete discussed audit details with Alan over drinks, this situation could impair auditor independence and objectivity, potentially biasing the audit process. Ethical guidelines under AICPA and PCAOB standards dictate that auditors must maintain independence and disclose conflicts of interest. The presence of such relationships could also affect the credibility of the audit opinion.

Operational issues highlighted include Kim’s focus on the Best Boy Gourmet line at the expense of regular line operations, inventory waste, and supply chain delays during winter months. These operational risks could lead to understated costs, overstated inventory values, or operational inefficiencies. An important audit procedure would be to review inventory turnover ratios, wastage reports, and supply chain records to assess operational efficiency and the valuation of inventory and cost of goods sold.

Jillian’s practice of projecting sales and paying commissions ahead of actual revenues introduces the risk of misstatement in revenue and expenses. As projections tend to be inaccurate by about 11%, there is a concern about overestimating revenue or expenses to meet target figures. Archival and analytical procedures should include scrutinizing the assumptions behind projections, actual sales vs. projected, and the timing of revenue recognition.

Additionally, the legal proceeding against a fired employee and the lawsuit involving the employee's claim about dog ownership might have legal implications affecting the company’s liabilities and disclosures, which auditors must evaluate. The pending lawsuit involving Pup Stores Co. also indicates a need for judicious assessment of contingent liabilities and legal expenses, in accordance with GAAP, for proper disclosures in financial statements.

In conclusion, the case of Smackey Dog Foods presents multiple audit risks including inventory misstatement, revenue recognition issues, receivables collectability, related-party bias, operational inefficiencies, and legal exposures. Auditors must employ a mix of substantive procedures, internal control testing, analytical review, and professional skepticism to form a fair and accurate opinion. Ensuring independence, maintaining objectivity, and adhering to auditing standards are essential to preserving the integrity of the audit and providing users with reliable financial information.

References

• Auditing Standards Board (ASB). (2020). AU-C Section 315: Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement.
• DeZoort, F. T., & Salterio, S. E. (2001). The effect of corporate audit committee characteristics on regulatory compliance and a firm's financial reporting quality. Accounting, Organizations and Society, 26(7), 555-578.
• Glover, S. M., & Prawitt, D. F. (2014). Auditing & Assurance Services (10th ed.). McGraw-Hill Education.
• International Auditing and Assurance Standards Board (IAASB). (2018). International Standards on Auditing (ISA) 330: The Auditor's Responses to Assessed Risks.
• Public Company Accounting Oversight Board (PCAOB). (2020). Auditing Standard No. 2301: The Auditor’s Responses to Risks of Material Misstatement.
• Rees, L., & Wittenberg, M. (2013). Auditing: A Risk-Based Approach (8th ed.). Wiley.
• Schwarz, R. (2018). Ethics and Independence in Auditing. Journal of Accountancy, 226(1), 56-61.
• Stansfield, C. (2019). Internal Control and Risk Assessment in Auditing. Internal Auditor, 76(2), 30-37.
• Zainub, I., & Wall, G. (2013). Assessing Tourism Planning: Goals and Objectives for Egyptian Tourism. Journal Of Hospitality & Tourism, 11(1), 43-53.
• Australian Auditing Standards (ASA 540). Auditor’s Responsibilities Relating to Fraud in an Audit of a Financial Report.