Based on your analysis, prepare a memo to the audit manager suggesting areas in K&K’s inventory and production-costing systems where your firm could provide advice and value-added services to the client. In addition, given K&K is a non-public company, suggest any areas in which your firm might be able to provide consulting services that would be of value to the client.

Question

What will be an ideal response?

Answer 1

The memo should be professional in appearance and in substance, and should be well written. The
memo should include the points brought out in the preceding questions, which are designed to help
prepare the students to make reasoned and informed recommendations. The memo should also include
clear statements concerning the risks and concerns encountered by the audit team. Additionally, the
memo should contain clear recommendations about the areas in which the audit team can provide
value-added services to the client. There are no strictly right or wrong recommendations as long as
students demonstrate that they weighed the issues and evidence and made a reasonable decision based
on the information provided.
The primary recommendation that the students should arrive at in terms of adding value
should relate to the need for K&K to implement a new cost allocation system that assigns costs more
accurately. A more accurate system will not only resolve some audit risks relating to valuation of
inventory and Cost of Goods Sold, but will also help management make better decisions relating to
their two product lines.