Engagement Risk Analysis Forms

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					                                     Accounting 541
                                         Audit II
                                   2010 Spring Quarter

Professor: Michael M. Gibson (Mike)

Class Time: Thursday 6:00-8:40 PM
Classroom: Pigott 204
Office: Pigott 532
E-Mail: gibsonm@seattleu.edu
Office Hours: Thursday 5:00-6:00
Phone: 206 409-8384

Prerequisites: Accounting 535

Course Objectives

The objective of this course is to provide you with an in depth follow-up to the
introduction of the basic concepts of Audit I. Emphasis will be on 1) the practical
application of the concepts to contemporary cases and to specific areas of the financial
statements and internal controls and 2) to the continued improvement of your analytical
and communication skills.

Required Materials

Auditing and Assurance Services: An Integrated Approach, 13th Edition, by Arens, Elder
and Beasley

Contemporary Auditing Real Issues and Cases, 7th Edition, by Knapp


Grades will be based on your performance in the following areas:

Midterm Exam                                        100 points
Participation                                       100 points
Knapp Case Write Ups                                100 points
Engagement Audit Plan Write Up & Presentation       100 points

Total                                               400 points
Class Participation

This is a case based course and active discussion and participation are important factors
in achieving the learning objectives. Your grade will be affected by your willingness
and ability to ask and answer questions that make a positive contribution to the class and
your active participation in the class discussion (particularly case studies). The vast
majority of accountants’ interactions with others are verbal. For this reason, the
development of oral skills is given a high priority in this course. The classroom should
be considered a laboratory in which you can test your ability to convince your peers of
the correctness of your approach. Some of the characteristics of effective class
participation are as follows:

   •   Are the points that are made relevant to the discussion in terms of increasing everyone’s
       understanding, or are they merely regurgitation of case or readings facts?
   •   Do the comments take into consideration the ideas offered by others earlier in the class,
       or are the points isolated and disjointed?
   •   Do the comments show evidence of a thorough reading and analysis of the case?
   •   Does the participant distinguish among different kinds of data: that is, facts, opinions,
       assumptions, and inferences?
   •   Is there a willingness to test new ideas or are all comments cautious / "safe"?
   •   Is the participant willing to interact with other class members by asking questions or
       challenging conclusions?

Here is how I will measure your class contributions:

1. Good Contributor: Contributions in class reflect thorough preparation. Ideas offered
are usually substantive, provide good insights and sometimes direction for the class.
Arguments, when presented, are generally well-substantiated and are often
persuasive. If this person were not a member of the class, the quality of the
discussion would be diminished considerably.

2. Adequate Contributor: Contributions in class reflect satisfactory preparation. Ideas
offered are sometime substantive, provide generally useful insights, but seldom offer
a major new direction of the discussion. Arguments are sometimes presented, and are
fairly well substantiated and sometime persuasive. If this person were not a member
of the class, the quality of the discussion would be diminished somewhat.

3. Non participant: This person has said little or nothing in this class to date. Hence,
there is not adequate basis for evaluation. If this person were not a member of the
class, the quality of the discussions would not be changed.
Engagement Audit Plan Project

During the first week of the quarter students will be assigned to groups and each student group will be
assigned a public company (your client) for which the group will complete an engagement risk analysis
project. Each group will assume the role of an audit manager of a public accounting firm who has been
asked by an audit partner to develop a 2010 audit plan for the given company as an audit client and to
write a memorandum summarizing this plan. This is an open ended assignment which means that you can
choose to structure your memorandum and presentation in any way you deem appropriate. However, at a
minimum, your memorandum and presentation should cover the following points:

       • Present a brief company profile including history of the company, major products,
       principal officers and any recent developments concerning the company.

       • Present key items for consideration as the areas considered to be of high risk. These are
       potential hot spots that may demand special attention during an audit. Examples: a
       decline in inventory turnover rates; existence of management bonus plans tied to reported
       profits; significant number of related party transactions; new, high risk projects/products;
       important technological advancements or changes in the company’s industry; revenue
       recognition accounting challenges; a significant increase in bad debts over the past year;

       • Present the team’s determination of materiality relative to you client. Determine that
       amount that would render the financial statements not to be fairly presented if such
       unadjusted difference or differences were not posted in the final preparation of the
       financial statements.

       • Include a discussion of the types of audit procedures that should be employed
       by the audit team to address identified risks. Examples: tests of the reasonableness of key
       estimates that have an impact on a management bonus plan tied to reported profits.

       • Discuss the apparent financial condition of the company and highlight key financial
       ratios such as the current ratio, return on assets, inventory turnover, etc. In particular, you
       should highlight the ratios and trends that may be indicative of audit risks that warrant an
       audit response (audit procedure). For example, if the return on sales percentage has
       plummeted in recent years that fact should probably be brought to the attention of the
       partners with, of course, some explanation as to what caused the decrease.

       • Discuss primary fraud risks (3-4) specifically applicable to your client explaining the
       risk and the planned audit response.

       • Conclude with a recommendation for the partners as to whether this engagement is
       considered to be of a high, moderate, or low risk engagement to your firm.

       • Each team member should separately prepare and submit an evaluation of their team
       member’s performance on this group project.
Background information and financial information for your client is available on line by
reviewing the client’s 2009 Annual Report on Form 10-K and 2010 Quarterly Report on Form
10-Q (not likely available until early May). Feel free to use all reference sources available such
as Moody’s, Dun and Bradstreet, Standard and Poor’s, sec.gov, etc. Those sources that supply
SIC code data will be particularly useful.

Expect the memorandum to cover 4-5 pages, double spaced, not including appropriate exhibits.

Grading criteria for this project are: thoroughness of the risk assessment, accuracy, coherent
structure, demonstration of concise business writing skills, degree to which your conclusion is
supported by your analysis, grammar and neatness.

During the last class, each group will be required to make a 20 minute PowerPoint
presentation regarding its 2010 audit plan to the engagement Senior Managers (other classmates)
and the engagement partner. The engagement Senior Managers will be responsible to ask
questions, review and approve the proposed audit plan. The presentation should provide an
overview of the items identified above and/or other appropriate information.


The mid term exam is “closed book”. It must be taken on the day and time scheduled.
No make-up exams will be given unless you have received permission in advance. The
score for a missed exam will be 0.

Knapp Cases

Students will prepare the Knapp cases for grading in their assigned groups. Each case
write up is worth 20 points. (Six cases reviewed with 20 extra points available.) Written
solutions to the cases should be prepared on a word processor and be supported by the citations
to the CSAS where appropriate. This will be appropriate for the large majority of the case
questions. Cases are due on the dates indicated in the schedule and we will devote some portion
of each class to a discussion of the case(s) due that night.
Academic Honesty

In order for you to be a successful and respected business professional, you must have
high standards or honesty and integrity. These qualities are also expected of you in this
class. Cheating and other forms of dishonesty, including plagiarism and copying work
from other students (current or former), on exams, quizzes, cases etc. will not be tolerated
in this class. I expect that you will abide by the University’s Academic Honesty Code.
“Seattle University is committed to the principle that academic honesty and integrity are
important values in the educational process and that violations in this area should be dealt
with in the appropriate manner.” (Undergraduate Bulletin)

Link: http://www.seattleu.edu/home/learning teaching/bulletins of information/.

If you are not sure whether a particular action is acceptable according to the Academic
Honesty Code, you should check with me before engaging in it.


If you have, or think you may have, a disability (including an ‘invisible disability’ such
as a learning disability, a chronic health problem, or a mental health condition) that
interferes with your performance as a student in this class, you are encouraged to arrange
support services and/or accommodations through Disabilities Services staff in the
Learning Center, Loyola 100, (206) 296-5740. Disability-based adjustments to course
expectations can be arranged only through this process.
                               Course Schedule (v2.0)
Date     Topics                                                    Case

4/01     Class Introductions
         Review of Syllabus
         Introduction/Review of Audit Model
4/08     Chapter 15 * – Sampling for Tests of Internal             ZZZZ Best Company
4/15     Chapter 17 * – Sampling for Substantive Tests             Enron
4/22     Chapter 23 * – Auditing Cash and Investments              Lincoln Savings and
                                                                   Loan Association
4/29     Chapter 21 * – Inventory                                  Crazy Eddie, Inc.
5/06     Internal Control Issues                                   New Century Financial
         Chapter 5 *– Legal Liability                              Corporation
5/13     Midterm Exam (Chapters 5, 15, 17, 21 & 23)

5/20     Use of Analytical Procedures and                          US Surgical Corp
         Audit Planning
5/27     Chapter 11 *– Fraud Auditing (refresher)
         Chapter 13 *- Overall Audit Plan and Audit
         Program (refresher)
6/03     In Class Presentations of Engagement
         Risk Analysis (One Brave Team)
         Chapter 25 *– Other Forms of Assurance
         Guest Speaker – Other Forms of Assurance
6/10     In Class Presentations of Engagement
         Risk Analysis (Five Teams)

   •    * Homework for this week includes the completion of each of the questions at the end of
       each respective chapter referred to as “Multiple Choice Questions From the CPA
               Tentative Engagement Planning Assignments

Alaska Air                            Team 5     High Fivers
Amazon.com (AMZN)                     Team 2
Dendreon Corporation (DNDN)
Esterline Technologies Corp. (ESL)
Flow Intl Corp (FLOW)
Getty Images, Inc. (GYI)
Nordstrom (JWN)                       Team 3
PACCAR (PCAR)                         Team 4
Plum Creek Timber Co., Inc. (PCL)
Pyramid Breweries, Inc. (PMID)
Redhook Ale Brewery, Inc. (HOOK)
SonoSite, Inc. (SONO)
Starbucks (SBUX)                      Team 6
Weyerhaeuser (WY)

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