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Developing Responses to Assessed Risks

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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 Television's 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?

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Solution Summary

This solution provides a detailed explanation of how to answer the given series of questions regarding assessing risks that have been identified by an audit.

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Dear Student,

Thank you for using BM.
Below are my answers.

Sincerely,
Anna Liza Gaspar

ANSWERS

Risk #1
a. Existence
b. Yes, this assertion related to inventory presents significant inherent risk. This is due to the fact that inventory is subject to misstatement from its nature - inventory valuation is often times a subjective decision.
c. As regards staffing decision for the audit engagement, I would assign several junior or associate auditors in randomly comparing inventory at hand with the records and inventory records with inventory at hand.
d. As regards the nature of the audit tests, the tests to be done should included ...

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