Accounting Question

Overview

For this project, you will focus on preparing two reports: a financial statement audit report and an internal controls audit report. An audit of financial statements and internal controls adds credibility to the reported financial position and performance of a business. The Securities and Exchange Commission requires all publicly held entities to file annual reports that are audited. An audit report can provide shareholders with reasonable assurance that the financial statements presented are true and do not contain falsified information. This creates a positive position for further investment in a company.

Scenario

The auditing team of your CPA firm has performed an audit engagement for the Cloud9 company, which consists of testing financial statements, internal controls, and other factors that could have an impact on the company’s position. Using the Summary of Audit Findings document from this engagement, provided in the

Supporting Materials

section, you will provide two written audit reports. Each report should include all sections of the audit in accordance with the Generally Accepted Auditing Standards (GAAS) you’ve studied within this course.

Directions

After reviewing the Scenario and Supporting Materials sections of this document, you will complete an analysis of the audit engagement program using the Summary of Audit Findings document and then write your financial statements and internal controls audit reports.

For each report, you will:

1. Begin by analyzing the results from the Summary of Audit Findings document to identify anomalies, control deficiencies, and materiality that will impact your opinion.
2. You will then identify critical matters to be incorporated into the financial statements and internal controls audit reports. Use the auditing standards provided in the Supporting Materials section to guide your decisions (e.g., AS 2201).
3. Next, you will formulate your opinion, whether a qualified opinion or unqualified opinion, using the correct auditing standard found in the Supporting Materials section. Use these accounting standards along with the results from the Summary of Audit Findings document.
4. Finally, once you have all of the necessary information gathered and your analysis is complete, you will create two written audit reports, one covering financial statements and one covering internal controls. Each audit report will be based on Generally Accepted Auditing Standards (GAAS).

Specifically, you must address the following rubric criteria:

1. Identify anomalies found during substantive and control testing for each audit report.
2. Analyze materiality of control deficiencies and financial misstatements that impact materiality for each audit report.
3. Identify critical matters for each audit report.
4. Formulate an opinion of the audit based on audit results for each audit report.
5. Create audit reports (a financial statement report and an internal controls report) based on Generally Accepted Auditing Standards. Include the following:
   Type of audit report to be communicated to clientTitleClient informationIntroductory paragraphAuditor’s opinionBasis of the opinion
   Client’s responsibilityAuditor’s responsibilityCritical audit matters

What to Submit

To complete this project, you must submit the following two reports:

Financial Statement Audit Report

Submit a 1- to 2- page Word document with 12-point Times New Roman font, double spacing, and one-inch margins. This assignment should include references cited according to APA style. Consult the

Shapiro Library APA Style Guide

for more information on citations.

Internal Controls Audit Report

Submit a 1- to 2-page Word document with 12-point Times New Roman font, double spacing, and one-inch margins. This assignment should include references cited according to APA style. Consult the Shapiro Library APA Style Guide for more information on citations.

Supporting Materials

The following resources support your work on the project:

Resource: Summary of Audit Findings

Resource:

AS 2201: An Audit of Internal Control Over Financial Reporting

Refer to the following standards for this assignment:

• .01

through .08

• .71 through .74
• .85 through .89

Resource:

AS 3105: Departures From Unqualified Opinions

Refer to the following standards for this assignment:

.01
• .03 and .04
• .18 through .22

Resource:

AS 3101: The Auditor’s Report on an Audit of Financial Statements

Refer to the following standards for this assignment:

• .01 through .12
• Appendix B

ACC 411 Project Three Summary of Audit Findings
Directions
Based on the Audit Teams’ findings, the following will be used to formulate the audit opinion of 1) the
financial statements, and 2) the effectiveness of internal controls over financial reporting.
Financial Test Results
Result #1
Sharon prepares a draft management representation letter for Jo, the partner, to review before
presenting it to Cloud9’s CEO and CFO to sign. The letter includes a statement about management’s
responsibility for critical accounting policies and critical accounting estimates. Sharon also drafts a
report to be used for communication with Cloud9’s audit committee. The report includes critical items
for Cloud9.
Revenue recognition is a critical accounting policy to discuss with the audit committee. Key items that
impact revenue recognition include the opening of a new company-owned store and sales and sales
returns to retailers such as department stores. Some of the critical accounting estimates to discuss with
the audit committee include compliance with standard ASC 606. The details to be discussed are:
ASC 606 Revenue Recognition
You’ve identified the contract with a customer with specified performance obligations, payment terms,
and rights of the buyer and seller.
Cloud9 charges customers for consulting services and workshops. The company accounts for all its
contracts the same way. All parties have agreed on a two-year contract that includes consulting fees of
$120,0000 and an onboarding fee of $10,000. The company has entered 100 contracts for the year.
Each customer paid $120,000 in advance of receiving promised goods or services. The entry recorded by
Cloud9 for each contract was as follows:
Account
Cash
Revenue
DR
$120,000
CR
$120,000
Record payment received on a 24-month contract for all services.
The onboarding fee is a one-time, upfront fee for set up and training and is recorded when the contract
begins. It was recorded as follows:
Account
Deferred Revenue
Service Revenue
DR
$10,000
CR
$10,000
Record onboarding fee revenue earned on a 24-month contract.
You believe part of this accounting is a departure from standard ASC 606, where all the contract revenue
should not be recognized upfront even if the company has been paid in full. Revenue is recognized when
the entity satisfies the performance obligations, regardless of when payment is received.
This is a material item for financial statements.
Result #2
The financial ratios indicate no problems with solvency, and the major borrowings are not due to be
repaid or refinanced for another four years.
However, Cloud9’s management is anticipating a decline in earnings this year because of the costs
associated with the new store opening and the sponsorship deal. Cloud9 does have a sizeable line of
credit at its bank that is currently not being utilized. If Cloud9 has an unexpected need for additional
cash, Cloud9 management could draw on the line of credit.
The team makes a note that these issues have been formally reviewed, and they conclude that there are
no significant issues casting substantial doubt on the going concern assumption.
Result #3
Our testing of accounts receivable using confirmations revealed two errors in our sample, that while
corrected by the client, were not corrected on a timely basis. Both errors resulted in overcharging the
customers. Auditors conclude this is not a significant deficiency.
Result #4
The testing of accounts payable revealed a classification error in writing a month-end accrual where
items that should have been accrued to accounts payable were classified as accrued liabilities. This
classification error amounted to $325,153.43. Accounts payable were understated by 2.84% and
accrued liabilities were overstated by 2.81%. However, there is no P&L impact.
Result #5
The testing of fixed assets for the year ended 12/31/25 revealed an understatement of fixed assets and
accounts payable as of 12/31/25. Fixed assets and accounts payable are understated by $463,197.
Performance materiality (tolerable misstatement) for the fixed asset testing was $1 million.
Result #6
Cloud9 opened its first retail store which brings new inherent risks, such as the risk of theft of inventory,
increased sales returns, and exposure to risk associated with leasing premises and equipment. Cloud9
must design internal controls for a retail location that are different from its wholesale operations. These
risks are not material to Cloud9’s overall operations at this time, but if retail locations expand then the
risk will increase. Therefore, it’s important that the first retail location be a learning ground for
management regarding proper internal controls over retail inventory.
Internal Control Test Results
Result #1
The audit team concluded that, at an entity level, there is sufficient evidence that Cloud9’s internal
controls are potentially effective. At a high level, the company demonstrates an environment where
potential material misstatements are prevented or detected.
Specific controls that affect transaction processes will be documented in more detail. Items to include:
• Cloud9 has a tightly structured system of performance reviews. Managers at each level must
report financial and operating performance against budgets at regular intervals.
• Higher-level managers can access information about activities within their area of responsibility
for monitoring purposes through the information system.
• Losses at retail stores have been contained following the installation of additional security,
including cameras.
• Testing showed a thorough approach to appropriate segregation of duties.
Result #2
Tests of controls show that IT general controls are effective. As a result, application controls can be
relied upon for their financial applications. Testing of the application controls showed operational
effectiveness.
Result #3
Javier and Cheyenne are pleased with the results of tests of controls related to the purchasing process.
They found strong controls over the master vendor file, and vouchers are prepared based only on
original invoices. Cloud9 is very careful about entering the right invoice number, including any leading
zeros, so an invoice is not paid twice. Finally, under David Collier’s direction, Cloud9 developed clear
procedures for accruing payables for goods received in the warehouse for which vendor invoices had
not yet arrived.
Other Test Results
Result # 1
Cloud9’s lawyers state that there are no pending legal issues, so there is nothing we need to emphasize
in that area. Cloud9 has had a decline in earnings this year, but that does not represent a growing
concern. There are no consistency issues with Cloud9’s application of accounting principles. So, we do
not need to add an emphasis-of-matter paragraph to this year’s audit report.
Result #2
Cloud9 opened its first retail store which brings new inherent risks, such as the risk of theft of inventory,
increased sales returns, and exposure to risk associated with leasing premises and equipment. Cloud9
must design internal controls for a retail location that are different from its wholesale operations. These
risks are not material to Cloud9’s overall operations.