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Risks of material misstatement: revenues, inventory

5-34 Risk of material misstatement, assertions

Demand is down for your client, a manufacturer of computer components. Backlogs from prior years are down by providing customer financing and they just cut back from three shifts a day to two shifts a day. Press reports indicate competitors are winning customers. Your client's R&D has not resulted in improved products. Furthermore, a few of your client's customers are experiencing financial difficulties because of slowing demand for your client's products.

What are the implications of these scenarios for revenue? What assertions are likely misstated? What accounts are likely over or under stated? What about inventory? Explain.

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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.

Assertions:

Occurrence: Pressure due to low sales will increase the temptation to stick in some falsified revenue.
Cut off: Pressure due to low sales will increase the temptation to record ...

Solution Summary

Six assertions and six accounts are mentioned with commentary explaining why.

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