memo P-14

Rubin and Lewis,

CPA

To: Ms. Dutra

From: Rubin and Lewis Auditors

Date: 11/6/2017
Re: Planning the Audit

Comments After carefully reviewing the client engagement letter and necessary documents, R&L would like to discuss
: the following business risks;
 Eagle View began a bonus system back in 2008 where every manager and assistant manager will
receive a cash bonus for their prior year’s sales. If the managers or assistant managers have an
incentive to receive more cash bonuses, they could easily manipulate the gross profits of the
store. An audit strategy would be to make sure there are no incorrect sales or sales return by
comparing customer receipts to financial accounts.
 Rosen argued hard against writing down the sixth store resulting in the predecessor auditor to
qualify it as an opinion. This may pose a threat to provide clear and valid information because
this shows that Rosen has an incentive. Rosen also did not like having to address the impairment
issue with his shareholders and bankers, which points to potential risk of withholding
information. We would have to compare financial statements with statements from an
independent third party such as their banks.
 All sales are done over the phone, which lacks evidence and documentation. Regular customers
can call in their own orders which means there are lack of controls being provided to secure
accurate evidence on sales. Improving controls by providing electronic receipts and provide
better documentation of sales is needed.
 Lack of segregation of duties, Polly Mitchell handles all of payroll records, Mark Rollins is
responsible for many duties throughout the company such as approval of all payroll expenses.
We would suggest Eagle View to improve their internal controls by separating Polly’s and Mark’s
duties.
Eagle View currently has six stores in operation. Store six’s gross profit is significantly less compared to the
rest of the stores and does not cover operating expenses. Store six is spending more to operate while
store three is the most profitable and makes up for 40% of total operating income. Since Eagle View
became the sole distributor for Wheatland Solutions, Wheatland Solutions should also be evaluated and
disclosed because sales have declined and there is strong competition in high end audio and video
equipment.
memo P-15
Rubin and Lewis,
CPA

To: Ms. Dutra

From: Rubin and Lewis Auditors

Date: 11/6/2017
Re: Applying Materiality

Comments Reviewing the potential fraud and incentives for misstatements, R&L have suggested the following
: benchmarks;
Strategic Benchmarking
 Eagle View needs to improve their overall performance and needs to think of long-term
strategies since they are trying to expand.
Internal Benchmarking
 Store 3 is most profitable that makes up 40% of total operating income from all 6 stores
currently in operations. Since store three is doing well, we should compare store three with the
other operating stores and see what they’re doing differently to improve profitability for all
operating stores.
External Benchmarking
 Since the sixth store was built adjacent to a shopping center that has been hit hard with
economic turndown, it’s important to compare with surrounding companies to see if the area is
profitable. When building the new building, Eagle View should asses surrounding companies to
see if they are profitable and compare profitable companies with other companies to see what
they’re doing differently.

2
memo P-16
Rubin and Lewis,
CPA

To: Ms. Dutra

From: Rubin and Lewis Auditors

Date: 11/6/2017
Re: Audit Risk Assessment

Comments Eagle View’s audit risk is high and detection risk is very low. This is because there is a lack of internal
: controls within the company. There is a need to better segregate duties, one person such as Polly should
not handle all the payroll expenses. This gives an opportunity to create a potential fraud or a material
misstatement.
Some preliminary analytical procedures would be to compare the company’s sales growth with the
industry’s sales growth and see if there are any significant differences.

3
MEMO P-17
Eagle View

To: Ms. Dutra

From Rubin and Lewis
:
Date: 11/6/2017
Re: Management Assertions

This assertion report will be broken down into four major components: the valuation of new assets
added in the most recent fiscal year, valuation of old assets, the proper recording of depreciation,
and the potential impairment of the existing assets. These assertions will address the existence of
assets, the completeness of transactions, and the valuation and appropriateness of financial
statements.  
The transactional-level assertions address accuracy, classification, completeness, cutoff and
existence.
 Rubin and Lewis assert that the full amounts of all transactions have been recorded
without error and all transactions are within the correct accounts.
 The assertion is that the allowance for bad debts include all appropriate accounts
receivable in the correct amounts.
 Rubin and Lewis assert that all transactions were recorded in the correct reporting period
and that all transaction actually took place.

Account assertions address completeness, existence, rights and obligations, and valuation.
 The assertion is that all reported asset, liability and equity balances have been fully
reported.
 Rubin and Lewis assert that all account exist for assets, liabilities and equity.
 The assertion is that Eagle View has the rights to all its assets and is obligated to its
reported liabilities.
 Rubin and Lewis assert that all asset, liability and equity balances have been recorded at
their proper valuations.
Certain corrections did have to be made, such as inventory totals,
With this R&L asserts that:
 PPE is physically present, all purchases and obligations are properly recorded
 Eagle View owns all of is PPE
 The PPE is properly valued and classified.

4
MEMO P-18
Eagle View

To: Ms. Dutra

From Rubin and Lewis
:
Date: 11/6/2017
Re: Audit Evidence Evaluation  

Obtaining and documenting sufficient appropriate evidence on which to base the audit is the main
objective of an audit on financial statements. Some of the main concerns that have come up with
audit evidence are as follows.
In the auditing of accounts receivable, the age of accounts were concerning, with the average age
of outstanding invoices being 40.3 days. For the auditing of inventory, our calculated amount of
inventory varied from the perpetual records and an adjusting entry was made. Some control flaws
that were concerning were with year- end liability processing. Only one office processed the
accounts payable invoices and Tammy Ross reviewed each invoice before payment. Another control
concern is with one person maintaining accrued expenses and maintaining records of recurring
payments for processing. The last major concern is Ron Rosen’s decision to keep expanding rather
than focusing on the warehouse.
The information was gathered via risk assessment procedures, tests of controls and substantive
procedures. Risk assessment procedures are performed to gather information for assessing the risks
of material misstatements in financial statements and whether those were due to error or fraud.
The misstatement of inventory is most likely an error in calculation. The risk assessment procedures
do not provide sufficient evidence on which to base the audit opinion but can be used to plan the
audit.

Tests of controls evaluate the operating effectiveness of internal controls in preventing and
detected misstatements. The control issues we found were based on one individual having access
with little or no oversight in departments that could lead to errors or fraud. Controls are very
important and have an impact on the audit opinion. Substantive procedures detect material
misstatements in various accounts that include test of details and substantive analytical
procedures.

These procedures along with document inspection, asset inspection, observation, external
confirmation, recalculation, re-performance, analytical procedures, scanning and inquiry helped us
obtain sufficient appropriate audit evidence. All the financial statements were inspected and
recalculated. Random transactions were selected from various accounts (accounts receivable, notes
payable etc.) to ensure that they were recorded properly, and all assets were confirmed to exist.
That evidence was used to help form the audit opinion.

5
6
MEMO R-1
Eagle View

To: Ms. Dutra

From Rubin and Lewis
:
Date: 11/6/2017
Re: Understanding Internal Controls   

An internal control system exists to assure operational effectiveness and efficiency as

well as measure to prevent fraud. In order for an auditor to test the internal controls, they must
have knowledge of the company’s control system. The distribution process systems has good
internal controls. With each document going out to multiple departments and everything getting
double checked. When a sale came in inventory was immediately checked, the sales department
got their copy of the sale form and once the product is shipped the accounts receivable
department records the sale.
The only control issue in the process of distribution is that Mr. Rosen has the ability to
override the senior VP. The senior VP, Sue Miller, verifies that the customer is in good standing
and has the available credit for the order.  If an existing customer has no outstanding invoices
and the available credit, she approves the sales order.  Sue does not approve new customers or
change credit limits.  The only person with such authority is Rosen.  If Sue cannot approve the
order, she forwards it to Rosen who reviews the relevant information.  Rosen then makes the
final decision to approve or reject an order.
In conclusion, the control systems for cash management have the same checks and
balances as the distribution processes. The evidence we gathered from testing controls and
observing the distribution process helped us conclude that overall Eagle View has very good
controls in place. Any concerns we had were minor and have been noted in previous memos.

7
memo D-3
Rubin and Lewis, CPA
To: Ms. Dutra
From: Rubin and Lewis, CPA
Date: 11/6/17
Re: Audit Testing of Revenues and Collection Cycle Accounts

Comments: Appropriate testing pertaining to the accounts receivable would be to confirm them by contacting a
random sample of customers to confirm paid/unpaid amounts. I will select invoices from accounts
receivable to test and compare to the process of documentation to see if billed correct amount, to
correct customer, and on correct dates. I will test to see if invoices date matches the shipping date for
the items to see if sales are being accurately recorded within the correct period and to test the correct
accounting period. Also, will be testing the cash receipts to verify customers have paid the invoices and
to check on payment coming through the bank account. Appropriate testing for the comparison of
previous year of bad debt expense, sales, accounts receivable and comparison within competition in
industry. Concerns pertaining to the age of account is 53.00 days compared to last year being 40.30
days which is over 10 days more of outstanding invoices which suggest a higher bad debt expense. A
general concern is pertaining to the General concerns pertaining to account is the high risks of fraud
that are possible from sales which would alter the entire financial statement and inventory. Another
general concern is of Warranty Payable and Warranty Expense due to approximately 1% being of sales.
Another general concern is the commission and bonus system in place for employees which would
alter and effect the financial statement. Specific concerns pertaining to the collectability is the lack of
physical documentation of sales since they are placed through phone and rely mainly on the receipts
created by management.

8
memo P-19
Rubin and Lewis, CPA
To: Ms. Dutra
From: Rubin and Lewis, CPA
Date: 11/6/17
Re: Fraud Risk Assessment

Comments: An update on Fraud Risk Assessment includes previously stated in memo P-14 still stand as a concern
about the possible risk of fraud and new ones. President, Mr. Rosen is still a large concern with his
optimistic and aggressive approach towards building the company. This focus on growing the company
larger and quickly could lead to incentive and rationalization to justify any fraud committed in the
hopes of bettering the company in his view. Mr. Rosen shows a determination to grow the company by
creating his own construction corporation and continuous possibilities for building future stores
although financials prove that retail stores are only marginally profitable and not growing. Mr. Rosen
lacks the ability to understand the full expense of his new building by admitting that he was unaware
of interest accrued during the construction phase, which shows a lack of responsibility and planning.
Previous errors of interest over assets could alter the audit process by creating more time looking over
the lease agreement, loan agreements in place to pay for the seventh store, valuation of long lived
assets and would create more testing to confirm documentation and valuation of assets. Another
major concern for possible fraud is the bonus system that the store managers and assistant store
managers receive for sales. These employees have pressure and incentive to commit fraud by altering
sales to receive a higher commission. This is a significant threat because they could be writing off more
items being sold which alters the accounts receivable, financial statement, inventory and is losing the
company money. After reviewing the store by store analysis for 2017, it is of concern that the store
number 3 has the second lowest salaries, commission, bonuses even though it produces the highest
sales and makes up 40% of the total operations. These possible risks would require more work and
testing pertaining to payroll, salaries, and commissions based off sales. To confirm accuracy of
commissions, and bonuses I would have to spend more time confirming sales made in every store by
doing more testing on controls and confirming with a random sample of customers for accuracy on
number of sales. I would also do more work in testing more of the internal controls in management
since there seems to be a failure in catching these possible risks. Another concern pertaining to sales,
is the lack of documentation provided since all sales are conducted through the phone. Conducting
sales through the phone provides opportunity and incentive to create fraud since lack of
documentation gives rationalization that employees won’t get caught. This will lead to more time in
testing and confirming accuracy of sales and of internal controls. A concern of risk is that some regular
customers can call in their own orders which is opportunity risk in altering financial statement due to
lack of accurate evidence of sales. Overall the sales accounts will have a significant effect on the audit
plan and create more time to test the accuracy of the numbers and controls within the company.
There is also of concern for segregation of duties within management, Mark Rollins oversees
numerous important duties including the completed bank reconciliations, related documents filed by
date which creates risk of opportunity and incentive for fraud. Including Polly Mitchell with the

9
 assistance of Mark Rollins also handles all the payroll records which lack segregation of duty. This
could alter the audit plan by creating more time to test the accuracy of controls and since
management has opportunity to alter financial statement and misappropriate assets within the
company.

10