Question

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 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 Television’s marketplace. Although the market place 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 appraisers of the fair value of the assets and has determined that about 35 percent of the purchase price should be allocated to goodwill.

Required:
In a memo format, answer the following questions for risks described in 1, 2, and 3 above.
Treat each case independent from one another. 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 nature of audit tests?
e) How might you respond to this risk in terms of timing of audit tests?
f) How might you respond to this risk in terms of extent of audit tests?

Answer 1

Answer:-

With regard to Risk which is identify in perpetual inventory system

Identify the relevant assertion?

They have a good perpetual inventory system and regularly compares inventory on hand with the perpetual records. The assertion of matching inventory records on hand rather automated the process .

Does this assertion represent a significant inherent risk? Explain.

Inherit risk is a likelihood of the misstatement, omission or errors which is material in nature when aggregating with others. Inherit Risk is came in to place because of environment of organization. By using old means of doing things especially in accounting of inventory leads to error or might be fraud

How might you respond to this risk in terms of staffing decisions?

The staff who’s allocate to ensure the quantity and quality of inventory must have sufficient knowledge and experience of audit procedure, they need to work with skeptical eye to identify any discrepancies in inventory procedure.

How might you respond to this risk in terms of the nature of audit tests?

There are a number of audit procedures which can be carried on to ensure the inventory figure

Observes the whole inventory count

Reconciling a number of figures with inventory register and general ledger

Observes the condition of inventory in order to ensure there obsolescence status

Observes that inventory in and out is totally stop during inventory count to ensure right count

How might you respond to this risk in terms of the timing of audit tests?

The timing of audit test is quite import with regard to inventory count because a year end inventory is book in financial statements so when auditor or their team member must need to at spot during the final inventory count.   

How might you respond to this risk in terms of the extent of audit tests?

In terms of audit extent of test, auditor can enhances their sample size to get the participation of further data from the population the enhances insurance level.

In relation with prices changing rapidly on marketplace

Identify the relevant assertion?

The prices in rapidly changing in a market place which can also highly effects the General Television, Inc The assertion are that company might face going concern issue if they don’t reacted with current external environment.

Does this assertion represent a significant inherent risk? Explain.

Inherit risk is mostly came from the industry limitation, in a rapid price changing environment general television going face some of problems from their competitors with regard to pricing. Although the flat television market is much more competitive which are initiating a high exposure

How might you respond to this risk in terms of staffing decisions?

When market place become more competitive mostly organization goes for cost cutting to ensure their survival so in that situation, I also like to reduce some of organizational employment cost

How might you respond to this risk in terms of the nature of audit tests?

The nature of risk organization is facing an kind of going concern that company don’t carried on their business in a foreseeable future. A rigorous examination of financial statement need to carry to identify general television upcoming payments of loan and analysis of future cash flow statement

How might you respond to this risk in terms of the timing of audit tests?

The timing of audit is vital because if organization don’t operate after the last audit report then is factor heavily effect the credibility of assurance firm, when organization facing such situation then audit firm need to take their eye on the operation of organization in order ensure about their last working as audit, so a continuous monitoring is quite necessary

How might you respond to this risk in terms of the extent of audit tests?

A further clarification must need to carried like confirmation from third party as confirming, if any, the sum of loan payment and confirming if general television is going to receive any payment from customer near in future to ensure the future cash flows.