4-15 Identify five other ways in which the Private Securities Reform Act of 1995will potentially change auditorsâ lega...
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4-15 Identify five other ways in which the Private Securities Reform Act of 1995
will potentially change auditorsâ legal liability. Explain how each is of potential
benefit to the auditor.
4-17 a. Identify how the Sarbanes-Oxley Act of 2002 changed the audit
environment for auditors.
b. Identify and explain new liabilities for managements of public companies
created by the Sarbanes-Oxley Act of 2002.
5-34 (Risk of material misstatement) Your client, a manufacturer of computer
components, has experienced slowing demand for its product. Recently, it cut
back from three shifts a day to two shifts a day, and the company has eliminated
the backlog of orders that existed in prior years by providing financing to
customers. Newspaper reports indicate that competition has taken significant
business away from the client because a large investment in R&D has not
resulted in improved products. Furthermore, a small handful of your clientâs
customers are experiencing financial difficulties because of slowing demand for
your clientâs products.
Required
a. Consider the implications of the above information for revenues. What
assertions, if any, are likely to be misstated? As a result, what accounts are likely
to be overstated or understated? Explain your reasoning.
b. Consider the implications of the above information for inventory. What
assertions, if any, are likely to be misstated? As a result, what accounts are likely
to be overstated or understated? Explain your reasoning.
5-35 (Developing responses to assessed risks) Your client, General Television,
Inc. manufactures televisions and during the current year acquired Micro
Engineering, Inc., which manufactured flat panel plasma screens for computers
so that it could compete in the market for flat panel televisions. Following is a list
of several risks that have been identified in the audit of this television
manufacturer.
1. General Television has strong internal controls over the existence of inventory.
It has a good perpetual inventory system and regularly compares inventory on
hand with the perpetual records.
2. Prices have been changing rapidly in General Televisionâs marketplace.
Although the marketplace is relatively stable for traditional televisions, the prices
on flat panel televisions have become much more competitive.
3. General Television had to pay a premium to acquire Micro Engineering.
General Television had independent appraisals of the fair value of assets and has
determined that about 35 percent of the purchase price should be allocated to
goodwill.
Required
Answer the following questions for the risks described in 1, 2, and 3 above.
a. Identify the relevant assertion.
b. Does this assertion represent a significant inherent risk? Explain.
c. How might you respond to this risk in terms of staffing decisions?
d. How might you respond to this risk in terms of the nature of audit tests?
e. How might you respond to this risk in terms of the timing of audit tests?
f. How might you respond to this risk in terms of the extent of audit tests?
will potentially change auditorsâ legal liability. Explain how each is of potential
benefit to the auditor.
4-17 a. Identify how the Sarbanes-Oxley Act of 2002 changed the audit
environment for auditors.
b. Identify and explain new liabilities for managements of public companies
created by the Sarbanes-Oxley Act of 2002.
5-34 (Risk of material misstatement) Your client, a manufacturer of computer
components, has experienced slowing demand for its product. Recently, it cut
back from three shifts a day to two shifts a day, and the company has eliminated
the backlog of orders that existed in prior years by providing financing to
customers. Newspaper reports indicate that competition has taken significant
business away from the client because a large investment in R&D has not
resulted in improved products. Furthermore, a small handful of your clientâs
customers are experiencing financial difficulties because of slowing demand for
your clientâs products.
Required
a. Consider the implications of the above information for revenues. What
assertions, if any, are likely to be misstated? As a result, what accounts are likely
to be overstated or understated? Explain your reasoning.
b. Consider the implications of the above information for inventory. What
assertions, if any, are likely to be misstated? As a result, what accounts are likely
to be overstated or understated? Explain your reasoning.
5-35 (Developing responses to assessed risks) Your client, General Television,
Inc. manufactures televisions and during the current year acquired Micro
Engineering, Inc., which manufactured flat panel plasma screens for computers
so that it could compete in the market for flat panel televisions. Following is a list
of several risks that have been identified in the audit of this television
manufacturer.
1. General Television has strong internal controls over the existence of inventory.
It has a good perpetual inventory system and regularly compares inventory on
hand with the perpetual records.
2. Prices have been changing rapidly in General Televisionâs marketplace.
Although the marketplace is relatively stable for traditional televisions, the prices
on flat panel televisions have become much more competitive.
3. General Television had to pay a premium to acquire Micro Engineering.
General Television had independent appraisals of the fair value of assets and has
determined that about 35 percent of the purchase price should be allocated to
goodwill.
Required
Answer the following questions for the risks described in 1, 2, and 3 above.
a. Identify the relevant assertion.
b. Does this assertion represent a significant inherent risk? Explain.
c. How might you respond to this risk in terms of staffing decisions?
d. How might you respond to this risk in terms of the nature of audit tests?
e. How might you respond to this risk in terms of the timing of audit tests?
f. How might you respond to this risk in terms of the extent of audit tests?
