You Decide – Smackey Dog Foods Inc

Smackey Dog Foods, Inc. is a familiar story in terms of small business start-ups. They started in a family kitchen, experienced explosive growth, and have had some troubles handling the accounting and business side of the business. My firm, Keller CPA’s, does not have specific experience with auditing a dog food manufacturer, but we certainly have a good bit of experience with similar small business accounting and auditing issues.
The first thing to address is the SEC’s role or influence over Smackey Dog Foods. Since Smackey is private there is not a direct oversight or reporting role for the SEC. Indirectly, however, they help establish GAAP and have a role in how the books should be maintained, …show more content…

Keller CPA’s has a responsibility to communicate, in writing, to Smackey’s management all of the significant deficiencies and material weaknesses that they found. The first issue that would qualify is the way inventory is handled on the docks with there being only one employee in charge who can easily (and is) manipulate the system. Also here, there is a lack of control for accounting for the returned bags, which would help identify when bags go “missing”. The next issue would be the sales forecasting, where there seems to be a lack of control for the overestimated sales, and paying ahead of time.
To address Smackey Dog Food’s accounts receivable I have a choice of a negative confirmation or a positive confirmation. The negative confirmation asks the customer to respond only if they disagree with the balance determined by the client. The positive form asks the customer to respond whether they agree or not (ais-cpa.com). I would use the positive form because there are some weak controls over AR, and request an invoice confirmation at a specific order and amount.
To confirm accounts receivable there are several factors that affect the sample size you choose to take. Some factors are the inherent and control risk you determine exists, the tolerable level of misstatement, and the type of confirmation chosen.
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