Question

Analyze the income statement for any potential risk factors and compliance issues with Generally Accepted Accounting Principles (GAAP) or International Financial Recording Standards (IFRS). B. Analyze the risk factors and compliance issues with GAAP or IFRS on the balance sheet. C. Using the internal control, analyze the cash and revenue for potential risk factors.

1. What risks need to be documented?

2. How does this information compare to the company or industry averages, or the company’s past performance?

D. Explain the audit universe and how you identified it.

E. Based on your analysis of risk, devise a sampling program for the audit universe.

F. Choose the most preferable audit testing procedures that could be used in the field, based on the audit universe items sampled in this situation.

ncome Statement

All numbers in thousands

Revenue	1/31/2018	1/31/2017	1/31/2016	1/31/2015
Total Revenue	500,343,000	485,873,000	482,130,000	485,651,000
Cost of Revenue	373,396,000	361,256,000	360,984,000	365,086,000
Gross Profit	126,947,000	124,617,000	121,146,000	120,565,000
Operating Expenses
Research Development	-	-	-	-
Selling General and Administrative	104,698,000	101,853,000	97,041,000	93,418,000
Non Recurring	-	-	-	-
Others	-	-	-	-
Total Operating Expenses	478,094,000	463,109,000	458,025,000	458,504,000
Operating Income or Loss	22,249,000	22,764,000	24,105,000	27,147,000
Income from Continuing Operations
Total Other Income/Expenses Net	-7,126,000	-2,267,000	-2,467,000	-2,348,000
Earnings Before Interest and Taxes	22,249,000	22,764,000	24,105,000	27,147,000
Interest Expense	-2,330,000	-2,367,000	-2,548,000	-2,461,000
Income Before Tax	15,123,000	20,497,000	21,638,000	24,799,000
Income Tax Expense	4,600,000	6,204,000	6,558,000	7,985,000
Minority Interest	2,953,000	2,737,000	3,065,000	4,543,000
Net Income From Continuing Ops	10,523,000	14,293,000	15,080,000	16,814,000
Non-recurring Events
Discontinued Operations	-	-	-	285,000
Extraordinary Items	-	-	-	-
Effect Of Accounting Changes	-	-	-	-
Other Items	-	-	-	-
Net Income
Net Income	9,862,000	13,643,000	14,694,000	16,363,000
Preferred Stock And Other Adjustments	-	-	-	-
Net Income Applicable To Common Shares	9,862,000	13,643,000	14,694,000	16,363,000

Answer 1

RISK FACTORS

The potential risk factors and compliance issues with Generally Accepted Accounting Principles (GAAP)–income statement

Cash flow treatment: Generally Accepted Principles require that firms should record income on the accrual basis. Revenues and expenses should only be recognized when the firm has earned it and not when it has paid the liability or received the cash. This will create the risk if the firm uses the cash basis.

Treatment of revenue from multiple obligations: most of the firms have failed to identify the best method to recognize revenue from that is attached to multiple obligations. This has since caused the International Reporting Standards 15 to clarify this dilemma.

The risk of material misstatements: The financial information which are not prepared using the acceptable accounting policies may have potential misstatement which will affect the decision making of the public. The international reporting body requires that firm must prepare their statements under the guidance of the body guidelines.

Analyze the risk factors and compliance issues with GAAP or IFRS on the balance sheet

Choice of method depreciation: This is one of the potential areas where by the different firms will record different values of depreciation based on the method of depreciation that was chosen.

Accuracy of data recorded: Some of the data that is recorded in the accounting books will affect the total value of the assets reported. Issues to do with cut off will affect the total amount of assets reported. The International Financial Reporting Standards require that transactions should be recorded in the year which it occurred.  

Potential Risk factors on cash and revenue

Generally, companies face risks I terms of handling cash and revenue records. Fraud has been witnessed mostly in relation to cash and revenue generation. Here are some of the risk factors affecting the two items. Amazon Company is a large company with equally huge transactions.

Cash fraud: Most of the companies have a limit of liquid cash at hand. However, cash can be easily misused by those who are managing it. Some managers are embezzling the cash at hand then cover up by balancing them from different accounts. In this case, daily cash limit must be determined and the minimal cash limit maintained.

Cash theft: This is majorly contributed by the fact that there are weak internal controls. Individuals may easily steal cash from the company without the notice of the management. The major control will be to do daily cash reconciling from the daily transactions.This is to keep up with all the updates of the cash transactions and minimize cash theft.

Revenue records: The sales revenues also faces the threat of false records. The persons in charge can easily bill the debtor low amount of debt as compared to the actual in order to benefit themselves. The firm can also record false record of sales in a way to impress the public. Since Amazon Company makes records huge revenue inflows, then I must recalculate its daily revenue entries to ascertain their accuracy.

Risk that need to be documented

Compliance risks: This is one of the common risks which auditors are finding during their audits. The management may choose to deviate from the principles that are stipulated by the international bodies in regard to the reporting of accounting information.

Procedural risks: These are risks that are arising due to the failure to follow the right procedures that are laid down by the management to guard the assets in the organization. Some of the procedures that are created may be may be weak and therefore gives chances of fraud to occur.

System risks: These are also risks which normally occur as a result of weak internal controls in the organization. This may lead to loss of information to the public or competitors. The worst is where individual can manipulate data that is kept by the firm thus losing its credibility for decision making.

Comparison of the firm with its past financial state

The financial position of the firm indicates a general drop in almost all accounts. This will indicate a risk that the firm is sinking. For example, the firm had a total assets of in the year ended December 2014 is $3,176,152 as compared to $3,819,939 in the year 2013. If this is not enough, the total shareholders’ equity dropped to $3,176,151 from $3,819,939 in the previous year of 2013. The management has to it has set all the structures to address the risks identified.

Audit Universe and how I identified it

The audit universe is generally the sample of the transactions in the company that are sampled by the auditor in order to use in his audit case. Since the risk is high, the materiality level is high. This caused me to increase the sample size in order to determine the audit risk and the detection risk. The sample size is increased in this case due to high materiality levels.

Based on your analysis of risk, devise a sampling program for the audit universe

The company has had must have had problems as it may be shown by drop of sales and almost every account. The sampling program that I will use include the cross sectional design and longitudinal studies in order to determine the fraudulent activities both at some point and over longer period respectively.

Most preferable audit testing procedures that could be used in the field

Observation: For example observing the flow of management roles in the organization and determining where the problem is lying in the controls established by the management of the organization.

Recalculation: This involves taking the actual figures say the number of sales then multiply by the number of units sold to determine the actual figures of the transaction.

Analytical procedures: The analytical procedures involves several procedures that are aimed at ensuring that the information provided by the management is the actual truth and none of the accounts are manipulated. For example inspecting a sample of the accounts.