Example of an Auditing Case StudyCase Study

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Auditing Case Study

The author of this report is asked to assess the case study relating to the company known as Smackey Dog Foods. The company is now being audited but there are some minor to major issues that will be identified, dissected and then solutions will be offered for each of the issues in question. For each problem and proposed solution, there will be backup from a scholarly source that supports the offered solution. While Smackey is doing a lot of things right, they are clearly a bit of a mess in some respects and they have some outright incompetent and/or unethical practices going on in other cases.

Regarding the analysis, the author of this report will address things in the order in which they appear in the report. First of all, the operation is clearly a family run operation as it was started by three sisters in the greater Chicago area. This alone can be cause for concern because family-run operations are often loyal only to family members and this can lead to the wrong people being involved in the company or at least those family members doing things that are ill-advised, egregiously bad or even illegal (Lucas, 2015).

Even with the concerns above, things started off well and the neighborhood dogs loving the food served as a springboard for the sisters to create their own business. Indeed, local pet stores and small grocery stores became distributors for the product. The demand and business got to be so much that the family operation had to expand and hire additional people. This is another point where the author of this report should stop and point out the dangers or at least concerns that exist when a business does certain things. When it comes to hiring employees other than close family and friends, there is the opening of the door to things like workforce management, employment taxes, more chance of litigation (e.g. wrongful termination, etc.) and so forth. Again, even with the concerns thus far, the sales for the firm were growing and growing. Sales got to the point where the product line was actually expanded to include the new "Best Boy Gourmet" line where there is no later than a three day window between the time a product is made and the time a dog eats the food. That window is a bit narrow but the profit margin is quite high. Indeed, the price point is three times that of the cost. However, supply of the root parts of the food has apparently been an issue because overall waste for that product has been fairly high. It should be assessed and measured just how much waste is actually occurring and whether that should dissuade the company from continuing to make the product and/or to do so in the way in which they are currently doing so (NCSU, 2015).

The next topic of discussion is the $150,000 loan that is secured for the business. Indeed, she uses the production equipment as collateral for the loan. When the discussion of another loan comes up, the bankers demand that a full audit of the financial documents occur before that loan will be released. To secure the loan, Sarah puts the accounts receivables up as collateral. Sarah looks at the sales projections for Jill's sales team and feels that there is little chance that the loan will not be paid off in short order. This becomes an issue later when it is clear that the accounts receivable are actually a liability of sorts for the company (Evans, 2015).

As noted in the case study, Kim manages the operations and overall production. She is in charge overseeing inventory, production and the shipment of dog food products. However, her attention has shifted away from the standard product line that got the business started and more towards the Best Boy Gourmet line. As such, there is apparently also some amount of waste with the general line of the products sold. There is also a problem with raw ingredients being problematic to get and keep rolling during the winter months. This contributes to the waste mentioned before. At times, it is to the point where production is at a dead stop because there is one or more raw components missing. If this business was being run properly, this should never be happening. There should always be a contingency involved whether it is a backup supplier or a supplier that simply does not fail to meet its demands. Negative events will happen from time to time and this is a part of doing business. However, it should not be happening on a common basis, by any stretch of the imagination (McKinsey, 2015).

The study then moves onto Henry, who is Kim's assistant. He only has one person that helps him but he is apparently the guy who makes the regular line of products with Smackey sell and move. One weak point with Henry is that a lot of returns have come in and they are just rotting on the dock. Given that dog food is presumably a perishable product, that is a liability and could easily be a source of loss for the company. It is later mentioned that one employee is putting "returned" dog food in the dumpster and then Henry is grabbing a bag at a time out of the dumpster and putting in his car. This raises the concern of whether the dog food is actually saleable or not or if it's expired. Regardless, it could obviously be re-sellable when it first gets returned and it could then expire. Regardless, Henry is either being extremely wasteful or he is committing theft. If the food is expired and nothing else could be done, then Henry could probably be excused except for the risk to his dog. However, if the food is not truly expired, he is stealing. Again, the returned food is not being managed properly regardless. The fact that he is doing it with the premium dog food is especially eyebrow-raising. This also makes it likely that the food has (or will soon) expire. As noted before, this begs the question as to why the product is getting wasted in the first place. As noted before, the Best Boy product has a lot of waste to it even if the profit margin on sold product is pretty good. Another huge area of concern is that Henry is not doing his job when it comes to returned product. Henry offers a fairly glib and unprofessional response and Kim just accepts it. Further, there might be some use for the expired food that Henry is taking (Downs, 2015).

The next item is especially concerning. Jillian is apparently the accountant but she is not good at it. She is also in charge of sales which makes things even worse. She manages a dozen people across three different states but is unable or unwilling to do the travel that is necessary to manage the group. The case study notes that she puts a lot of "faith" in her sales team. However, putting too much faith in the sales team is basically inviting more problems and she should know better. Further, she is not paying them consistently with actual and proven revenues. It is noted that the salespeople were complaining that they were not getting commission checks until the revenue was actually in the books. If indeed her accounting is as quick as it could and should be, this should be a non-issue. However, the author of this report fears that the more likely scenario is that Jillian is taking too long and the salespeople have a valid concern when they say they are not paid timely (IFAC, 2015).

Jillian makes things worse when she makes commission payments on revenues that are projected and not proven. The team loves this but what happens is that she ends up being off by about eleven percent. If "off" means that the revenue was shorter than what was expected, this means that the income to the salespeople was too much and there is little to no way to get that money back legally without enraging and alienating the salesforce. What absolutely needs to happen with this situation is that the revenues should be calculated timely and accurately. The salespeople should be paid only after the revenue is calculated and verified. So long as the calculations are done expediently, accurately and then the salespeople's checks are cut, that should address the situation. However, it will need to be communicated that commission checks will fall because the prior checks were too high. However, it will also be noted that over-payments will not be pursued by the company. Recoupment of wages could be done but would create more messes than it would solve (DWT, 2015).

The next item of concern pertains to the quandary and potential issue of hiring new employees as mentioned before. There is apparently a requirement that any employee of Smackey owns a… [END OF PREVIEW]

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