Do you believe that the Mellow Markets audit is in compliance with these standards? Explain.

Question

Alan Fallon was recently promoted to senior accountant. He was put in charge of
the Mellow Markets audit because of his experience with other grocery clients.
Mellow Markets has a small, but growing chain of natural food stores. This is the
first year Mellow Markets has been audited. Because of its growth, Mellow needs
additional capital. Mellow intends to take its audited financial statements to a
bank to secure a loan.
Alan has been assigned two inexperienced staff assistants for the audit. Because
this is his first audit as a senior, he intends to bring the job in on budget. To save
time, he gave the assistants the audit program for Happy Time Food Stores. He
told his staff that this would make things go more quickly. He also told them that
he could not spend much time with them at the client's place of business because
"my time is billed out at such a high rate, we'll go right over budget." He did call
them once a day from another audit on which he was working. The assistants told
Alan that the audit program did not always match up with what they found at
Mellow Markets. Alan responded, "Just cross out whatever is not relevant in the
audit program and don't add anything-it will only make us go over the budget."
When Alan came out near the end of fieldwork, one assistant communicated her
concern that they had not attended the inventory counts at any of the out-of-town
locations of Mellow Markets. The audit program had stipulated that inventory
should be observed for in-town stores only. Happy Time had only one store not in
town while Mellow Markets had three of their five stores in other cities. Alan
told the assistant to get inventory sheets from the client for the other stores. He
added, "Make sure that the inventory balance in the general ledger agrees with
the total for all the inventory sheets." The next day, Alan reviewed all work
papers and submitted the job for review by the manager.

Required:

Answer 1

1. The Mellow Markets audit is not in compliance with these standards. A proper audit program was not
prepared. This, along with the emphasis on cutting time, means that it is also doubtful that a meaningful
knowledge of the client's business was obtained. It appears that the planning portion of the first
examination standard was clearly violated. The lack of time and attention the inexperienced staff received
from Alan Fallon is indicative of a violation of the supervision part of the first examination standard.
2. There is no indication of any steps taken to understand, evaluate, or test the internal control of Mellow
Markets. This is a violation of the second examination standard.
3. The third examination standard also seems to have been violated. First, the deficiencies in meeting the
first two examination standards suggest that the auditors could not have obtained sufficient appropriate
evidence. In addition, the failure to observe any of the inventory counts in other cities is an additional
deficiency-particularly since Mellow is a new client. Finally, ensuring that the inventory sheets agree with
the balance in the general ledger account is merely a first step in the audit of inventory. By itself it is not
sufficient appropriate evidence.