Smackey Foods

Team E

External Auditing; Course #: 555

You Decide Course Project: Smackey Dog Foods, Inc.

DeVry Graduate School of Management

December 14, 2014

Smackey Dog Foods, Inc., a privately owned dog food manufacturing company, was started by three sisters, Sarah, Kim, and Jillian, in their suburban Chicago kitchen.  These innovative sisters started manufacturing a natural dog food with ingredients found in their local grocery store.  Local grocery stores and pet stores discovered the natural dog food becoming the first distributors for the company. The demand for Smackey Dog Foods, Inc. products increased significantly causing the sisters to expand the business. Smackey Dog Foods, Inc. moved into a larger facility that required more workers to handle the significant increase in sales.  In contrast to their competitors’, Smackey Dog Foods, Inc. sales were on the rise allowing the owners to open a boutique division, Best Boy Gourmet.  Sarah, the president and general manager, has recently met with a banker to request another loan for $150,000 to expand the facilities and equipment.  Their first loan for $150,000 was used to purchase industrial size food production equipment, which was secured as collateral for the loan.  Upon requesting another loan from the bank, the bank demanded an audit of the corporate financial statements of Smackey Dog Foods, Inc. before. My firm, Keller CPAs, and I have been hired to conduct an audit of Smackey’s financial statements that will be utilized in the approval process of the second $150,000 loan.

There are various issues we have identified with Smackey Dog Foods, Inc business operation. One of the first issues we identified was how Henry mishandled all of the returned dog food waste. He and another employee are later seen removing some of the returned dog food from a dumpster and Henry hauling it off in his vehicle. Another issue with the internal controls is Jillian’s operation over the sales team. Though there is a constant 11 percent decrease compared to what the sales team projects, she still grants them commission in advance.

A third issue is the breach of the Professional Rules of Conduct, rule 301 specifically, by one of our team members. Rule 301 describes the responsibility of the auditor as “a member in the public practice shall not disclose any confidential client information without the specific consent of the client.” Though Pete is unaware of Alan’s past marriage to Kim or the friendship with the banker, any discussion on an audit in progress is prohibited. As auditors, we are still responsible for remaining professional and keeping all information confidential on any client we accept. The fourth identified internal control issue is with the accounts receivable. Pup Stores Co. represents 31 percent of their sales, but is currently under a lawsuit. Due to the extensive legal fees, Pup Stores Co. cash reserves are being reduced and in turn, affecting the sales to our client.