ASSIGNMENT
Listed below are various risks identified during audit planning that you have been asked to evaluate to assess whether they are significant risks.
1. Fernandez Wholesalers sells energy drinks to various distributors. As they have expanded sales to additional customers, there has been some increase in the age of accounts receiv- able, which could require an increase in the allowance for doubtful accounts.
2. Sansone Construction builds light commercial real estate properties. This year they started a new project that is three times larger than previous projects completed by the company, and is the first one that will take more than one year to complete. The company has limited experience with percentage of completion contract accounting, and the project is running significantly behind schedule.
3. Horton Sports produces high-end sporting gear. Sales and receivables have increased significantly in the fourth quarter over the previous year, and the company has pressured customers in the past to purchase more product than they need, resulting in significant returns.
4. Alset Motors is a start-up focused on self-driving vehicles. Their technology has shown significant promise in selected test markets, but there are several competitors also in the market, including major auto manufacturers and technology firms.
5. Orion Computer has a significant amount of goodwill on its balance sheet resulting from its acquisition of another enterprise software company in the prior year. The company has seen a significant decline in sales and its stock price due to increased cloud computing.
6. Lumony manufactures yoga pants and other activewear. Due to changes in consumer tastes, it has experienced a significant build-up in inventory of two of its products that may require a write-down.
a. Describe what is meant by a significant risk. How is it different than an inherent risk or a business risk?
b. Which of the six risks described above should be considered a significant risk? Explain why they represent a significant risk.
c. For each risk that you identified as a significant risk, describe how you might address the risk to give it special audit consideration. For example, a valuation risk might be addressed by engaging a valuation specialist.
Describe what is meant by acceptable audit risk. Explain why each of the following statements is true:
a. A CPA firm should attempt to achieve the same audit risk for all audit clients when circumstances are similar.
b. A CPA firm should decrease acceptable audit risk for audit clients when external users rely heavily on the statements.
c. A CPA firm should decrease acceptable audit risk for audit clients when engagement risk is high.
d. Different CPA firms should attempt to achieve reasonably similar audit risks for clients with similar circumstances.
