Peach Blossom

1288 Words Dec 14th, 2014 6 Pages
October 8, 2009
To: Audit Team
Anderson, Olds, and Watershed

Re: Analytical Procedures

Audit Risks:

After analyzing the financial statements of Peach Blossom Cologne Company, we have concluded through the change analysis the following accounts contain some measure of audit risk. In analyzing the change analysis we concluded on threshold amounts of any change exceeding 15% and above the amount of $5000. If both criteria were met, a business reason and possible client error reason were provided. The following accounts provide the possibility for audit risk:

Cash- Business reason: Acquired a loan during the period to obtain cash; Client error: Not properly recording all expenses paid in cash
Accounts Receivable- Business reason:
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There are some items that could affect the account (more reliable suppliers lowering the percentage calculated), but this seems to go against the increase in accounts receivable. It will be important for the audit team to find the underlying cause for the decrease in the percentage estimated.
Depreciation expense- Depreciation did increase from the prior year, but not to the extent which would have been expected. Peach Blossom made many equipment purchases in office, auto, and machines all increasing from the prior period. It would be expected to have increased at a higher rate. The audit team must figure out which method of depreciation Peach Blossom is using and make sure first year depreciation on assets is being calculated.

Assessment of Risk of Financial Failure:
After analyzing the financial ratios of Peach Blossom Cologne Company, we place the company at a low risk of client financial failure. The amount in sales, net income, and debt the company has incurred show the company does not have an issue paying its liabilities. The ratios are analyzed below in order to show the reasoning behind our distinction of the risk of financial failure.
Current and quick ratios- The current ratio shows the companies’ ability to pay off its debt obligations in a timely manner The ratios for Peach Blossom for the past two years are well above the industry averages of both of the ratios.. It is therefore unlikely
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