Scenario Summary
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Your Role/Assignment
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Key Players
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Additional Information
Category
Points
Total
100
%
Description
A quality paper will meet or exceed all of the above r
Introduction
KEY PLAYERS
YOU DECIDE
Assignment
Scenario
Smackey 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 sales people 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. Pete is unaware of the relationship. Pete has talked about some of the details of
the audit to Alan over a few beers.
You Decide
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.
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