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Modern Auditing - 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 client's customers are experiencing financial difficulties because of slowing demand for your client's products.

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.

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Dear Student,

Here are the answers to your questions:

(a) The assertions that are likely to be misstated here are: presentation (or occurrence) and existence (or ownership), and completeness. This assertions for a revenue item such as membership fees (or number of units sold) would include:

- occurrence - the revenue was earned by the organization (number of items sold was the actual number);
- ownership - the fees and items sold did not belong to another organization (and not some other store, competitor, etc.);
- completeness - all the revenue that was earned was recorded properly on the ...

Solution Summary

Responses to questions.

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