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Unformatted text preview: CHAPTER 6 APPENDIX AUDIT CASE EXERCISES 6C-1 SOLUTION: KCN Analysis of Audit Strategy Section Purpose Content OBJECTIVES OF THE ENGAGEMENT To describe the services that are to be rendered to the client. The objectives are (1) audit of KCN's financial statements for the year ended 12/31/X5, and (2) issuance of a letter on compliance with covenants of the client's letter of credit agreement. BUSINESS AND INDUSTRY CONDITIONS To describe the nature of KCN's business and industry. KCN sells and services micro-computers, networking hardware and software to business customers. The industry is sensitive to economic conditions and very competitive, with KCN competing with companies much larger than itself. KCNs long-term success depends on its ability to attract and retain qualified information technology personnel. The annual growth in spending for information technology products and services is expected to be 6% per year for the next three years. PLANNING MEETINGS To indicate meetings held with client and with CPA engagement team. At this point, one meeting has been held with client personnel and one with the engagement team. OWNERSHIP AND MANAGEMENT To describe the owners and management of the company. KCN is privately owned by Terry Keystone, Mark Keystone, John Keystone, Keith Young, and Rita Young. Terry and Mark Keystone participate in management. OBJECTIVES, STRATEGIES AND BUSINESS RISKS To describe KCNs business objectives, major strategies and the risks related to achieving its objectives. The major objective of KNC is to increase revenues by 10% and increase net income by 12% for each of the next 3 years. Major strategies include: (1) aggressive advertising, (2) sales to customers with higher risk profiles, and (3) new software development. The primary risks include (1) advertising may not create the desired results, (2) credit losses may exceed benefits of increased sales, and software development activities may not produce products. MEASUREMENT AND REVIEW OF FINANCIAL PERFORMANCE Describes the methods used by management to monitor performance. Measures used to monitor performance include: (1) inventory and receivables turnover, (2) aging of accounts receivable, (3) sales and gross margins by type of revenue, (4) net income, and the total inventory balance. 6-1 PROCEDURES TO OBTAIN AN UNDERSTANDING OF THE CLIENT AND ITS ENVIRONMENT Describes the procedures used by the auditors to obtain an understanding of the client and its environment....
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This note was uploaded on 01/10/2012 for the course ACC 435A taught by Professor Hathcock during the Winter '11 term at National.

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