Smackey Dog Foods Inc.—Scenario Summary
Smackey Dog Foods Inc. started in the kitchen of Sarah, Kim, and Jillian’s family home in the suburbs of Chicago. The
three sisters initially bought the ingredients for their natural dog food recipes from the local grocery store. They used their
dogs and the neighborhood dogs as their taste testers. Their dog food products were so good, the local kennels and
veterinary offices were glad to distribute the sisters' products to their customers.
Local demand increased significantly. Local pet stores and small grocery stores discovered the products and became
distributors. The sisters moved the expanding business into a larger facility and hired a few more workers. Although their
competitors’ sales were flat or declining, Smackey Dog Food Inc.’s sales were on a vertical climb!
Sales were so good last year that the sisters opened a boutique division named Best Boy Gourmet, specializing in freshly
manufactured, one-serving packages meant for consumption no later than 3 days after production. They sell this product
at three times the cost of their other products and by special order only through their new website. Demand is high, but
waste has been an issue.
Sarah is the president and general manager of the operation. Sarah has been very proactive in growing the business. She
has met with her banker to discuss expanding the facilities and equipment with another $150,000 loan. Their first loan for
$150,000 was secured by the industrial-size food production equipment purchased with the loan. The banker now
demands an audit of the corporate financial statements before releasing another loan to the company. Sarah has offered
to place the corporate account receivables up as collateral to secure the second loan. Based on revenue projections by
her sister Jillian’s sales team, Sarah believes that the company will not have trouble paying down the loan in a short
period of time.
Kim manages the production operations. She oversees the inventory, production, and shipment of dog food products. The
Best Boy Gourmet line has taken almost all of her attention lately. The winter holidays are approaching, and sales demand
based on forecasts from the sales force are higher than ever. Attaining fresh, raw ingredients is more difficult in the winter
months. If any of the fresh ingredients are delayed, production comes to a standstill. There has been significant inventory
waste as a result.
Kim’s assistant, Henry, monitors the production and shipment of Smackey Dog Food’s regular line of products. Henry
takes pride in his work and is involved in every facet of the operation. With only one other warehouse employee to help,
Henry personally is involved in preparing and approving all inventory records. Henry ensures that very little finished inventory sits in the warehouse. However, the shipping dock always seems to be full of returned dog food that should be
restocked. When Kim asks him about it, Henry laughs and tells her that "first in, first out" applies to dog food returns as
well. Kim smiles and just accepts that answer.
Jillian is not very good at understanding accounting. The sisters placed Jillian in charge of sales. She manages a sales
team of 12 salesmen in Illinois, Indiana, and Wisconsin. Her fear of flying and poor driving skills limit her ability to get
around to the areas outside of Chicago. As a result, she has placed a lot of faith in her sales team. The sales team
complained last year that they did not like waiting for their commissions until after bookkeeping calculated the actual
revenues. In order to keep their spirits fired up, Jillian has her salespeople project what their sales will be in the upcoming
quarter, and she pays commissions in advance on those projections. The sales team loves her, and Jillian loves their
approval. Jillian has noticed that the projections typically are off by 11% on average.
The employees of Smackey Dog Food Inc. all own dogs. It was a hiring requirement on the job application. One employee
was fired when it was discovered she never owned a dog when she was hired. A lawsuit is pending by the fired employee.
At this time, the receivables represent 29% of the corporate assets. The Chicago retail chain Pup Stores Co. is Smackey
Dog Food’s largest buyer. It alone represents 31% of overall sales and usually pays within 30 days. However, Pup Stores
is facing a major lawsuit from an animal rights group. The legal fees are eating into the company's cash reserves, and it is
facing some store closures.
The accounts receivable aging indicates that 38% of the receivables are 30 days or less, 22% are 31–60 days, 21% of the
receivables are 61–90 days old, and 10% are 90–120 days. The remaining receivables are older than 120 days. Sarah
has not written off any of the receivables, nor will she.
Sales are projected to steadily grow at 16% next year if the company does not expand its facilities. With the expansion,
sales are projected to rise 26%, with the most significant jump in the last quarter after expansion is completed and holiday
sales pick up.
Listen Your Role
You and your firm, Keller CPAs, have never audited a dog food manufacturer. Although it is late in the year to be accepting
a new calendar year-end audit, you need the work and have the time to devote to the audit before your 2-week ski
vacation in February. You begin the audit process just prior to year-end by sending your audit manager, Pete, and two audit staffers, Ben and
Maureen, out to the client. They spend time assessing the client and planning the audit.
During the first month of field work after year-end, Ben and Maureen note that the dog food bags piled high on the docks
are marked “Returned.” One employee is seen throwing bags of the premium Best Boy Gourmet dog food into the
dumpster in the morning and pulling it out and throwing it into Henry’s car during the employee lunch hour.
Pete’s new best friend, Alan, was married to Smackey Dog Food Inc.’s owner, Kim, 4 years ago. Alan is also good friends
with the banker from whom Sarah is seeking the loan. Pete is unaware of the relationship. Pete has talked about some of
the details of the audit to Alan over a few beers.
Listen Key Players Click on the Play button below each key player's image to listen to their input.
Pete, Audit Manager Play
00:00 Mute Transcript
Ben, Audit Staffer Play
00:00 Mute Transcript
Maureen, Audit Staffer Play
00:00 Mute
Transcript
Listen You Decide
Assignment
Required: During our course, each of you will prepare one short (five to seven pages, double-spaced) paper based on the
Smackey Dog Food Inc. case facts above. The purpose of the project is to move you beyond the black letter into the
actual practical application of legal principles in real-life situations. The project case is due at any point before the end of
Week 7. It serves to highlight the importance of audit opinions and reports. This project gives you an opportunity to
conduct certain audit procedures and determine the course of action regarding the audit.
Note: You are being graded on analyzing issues you identify in the project case, in addition to responding to the questions
listed in the YD_Activity (see link below). The objective of the Course Project is for you to apply the audit procedures and objectives learned in this course to a
practical example. Guidelines Papers must be five to seven pages in length, written in 10-point font, and double-spaced. Appropriate citations are required. All DeVry University policies are in effect, including the plagiarism policy. Papers are due during Week 7 of this course. Any questions about this paper may be discussed in the weekly Q & A Forum topic.
This paper is worth 140 total points and will be graded on the quality of application of audit theory to practice. Listen Grading Rubric
Category % Description Documentation and
Formatting 10% The paper should follow designated guidelines and use citations and
references appropriately. Organization and
Cohesiveness 5% The structure of the answers should be clear and easy to follow. Editing 5% Grammar and spelling should be correct. The sentence structure should
be appropriate. Content 80% The content should be comprehensive and accurate. Major points
should be adequately stated and address course concepts. The content Category % Description
and purpose of the answers should be clear. Total 100% A quality paper will meet or exceed all of the above requirements. Listen Best Practices
You are being graded on analyzing issues you identify in the project case in addition to responding to the questions listed
in the You Decide Activity (see the page in Week 1). Therefore make sure that you identify the issue; apply the concepts learned in the class to the issue; and give the source information.

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