Cableconotes

CableCo Notes Part III Questions: 1. a. Steve set the planning materiality at 3% of net income. b. From the audience’s perspective, there was not much analysis on Steve’s part. It seemed as though it was an arbitrary figure that was established in order to leave room for a margin of error. However, it is more likely than not that Steve performed a thorough analysis before deciding on this figure. 2. The auditors did not violate the AICPA’s Code of Professional Conduct in discussing the client-specific planning issues. This is a critical step in any audit engagement. The main issues were: * Realization of assets (in particular goodwill) – The auditors discussed that fact that cable is a natural monopoly and, due to oversaturation, the only way for CableCo to expand as intended is for it to acquire already established companies. * Poor segregation of duties – There is one person who is responsible for setting up customer accounts, billing the customers, and collecting the cash. * There is a lot of construction taking place and the costs need to be properly capitalized. The construction engineers are the ones keeping track of the costs and they may not be recording these costs in accordance with GAAP. 3. Engagement Objectives: * Issue a report on the following: financial statements for the Form 10-K, financial statement schedules, and management letter to the audit committee. * Develop and train staff to assume additional responsibility while maintain staff continuity. * Establish, develop, and improve PR&S’s relationship with client management * Review the following income tax returns for CableCo: i. Federal return, Georgia return, Florida return, North Carolina return, and South Carolina return * Meet the rate and budget goals Part IV Questions: 1. Problem #1 a. The payroll numbers for each year look the same, but they should be different due to the extensive construction taking place. The construction costs may be capitalized properly and this could be due to the outsourcing of the payroll or the fact that a new person is in charge of payroll this year. b. Barbara c. Barbara approach the new girl in charge of payroll and it was decided that they would determine the pay periods in which large construction projects took place in order to review how those costs were recorded. d. This was a good approach because it will accomplish the objective without making the payroll clerk feel stupid. In the long run, the clerk will learn how to properly record payroll while maintaining a friendly relationship with the auditors. Problem # 2 a. The company performing the majority of CableCo’s construction is owned by Doyle Matthews and his brother-in-law. This year, the amount of construction resulted in a material transaction and therefore the related party transaction needs to be disclosed in the notes. b. Barbara c. Matthews consented to the required disclosure d. This was a touchy subject for Doyle and Gayle handled it by demonstrating to him how the disclosure was ultimately in his best interest rather than telling him that he had to do it because it was the law. In doing this, the objective was accomplished and the auditor’s maintained a good relationship with the client. 2. If the acquisition goes through then several parts of the financial statements will need further attention. If the acquisition involves stock then the EPS is going to have to be recalculated. In addition, the newly acquired company will have to be audited in order to issue an opinion on the financial statements. Part V Questions 1. The score sheet is used to record the misstatements and show where they were found.