Course: ATG657 Date: March, 8 2016
Topic: Written Assignment #2 BU ID: 259212
Zoom Snowboards Inc.
Introduction
Zoom Snowboard Inc. is a privately owned Canadian Snowboard company, produces snowboards, apparels and videos. The major focus of the business is offering customized snowboards and it has recently expanded its business to the sports apparels. The company has seen tremendous growth in its new line of business but there are concerns regarding its pricing policies and the management has decided to set in place new discount and return policies that would be offered to the vendors.
In the given case study, as an audit scenario, I need to analysis the significant risks of material misstatements
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(AU-C 315 par. .06b and .A14 to .A16) Analytical analysis along with the experience from previous audits have helped us in identifying the risks at the financial statement level and identifying the six specific account balances that need to be focused while auditing the financial statements ending October
2011.
Answer 1: Risks of Material Misstatements at the Financial Statement Level
AU-C 315 Understanding the Entity and its environment and assessing the Risks of Material Misstatements, helps in understanding the risk of material misstatements at the financial level for Zoom Snowboards Inc. The risks at financial statement level along with the reasons associated to it are as follows:
1. Risk: The covenants of the loan agreement can create risk of material misstatement at the financial statement level. Reason:
a. Zoom is undertaking expansion of its business and negotiating with the bank for financing to fund its operations. Zoom is a heavily leveraged firm (Refer Annexure Part – E) and is subject to the restrictions placed by the bank and failure to meet them will raise a liability to repay the loan immediately and raises an issue of going concern of it operations.
b. Zoom has a limited source of financing and the cash flows are also limited, placing Zoom in
Snowboarding has reached a height in popularity that has some didn’t think was possible. The snow boring industry has grown by a tenfold by now grossing 5 billion dollars a year. Many companies have invested millions of dollars into
Audit Risk Assessment can be done by this Audit Risk Model. This model consists of 3 types of risks i.e., inherent risk, control risk and detection risk. Eventually, audit risk is a product of these 3 types of risks (Griffiths, 2012).
Finance. In order to finance our startup year, we issued stocks and borrowed loan to finance our operation and for safety in case the sales did not go well. Financing using stocks means that we are selling common or preferred stocks to individuals. In return for the money, they get some ownership over the company and its interest. This helps to bring public’s awareness about the company. If the sales suffice, we will pay the debt in the second round.
"In applying analytical procedures as risk assessment procedures, the auditor should perform analytical procedures relating to revenue with the objective of identifying unusual or unexpected relationships involving revenue accounts that might indicate a material misstatement, including material misstatement due to fraud. Also, when the auditor has performed a review of interim financial information in accordance with AU sec. 722, he or she should take into account the analytical procedures applied in that review when designing and applying analytical procedures as risk assessment procedures."
Throughout time, the progression and evolution of snowboarding has increased greatly. It has gone from non existence in the late 1970’s, to one of the most watched action sports in a matter of thirty-five years. The upward takeoff and popularity of snowboarding relies on two people, Jake Burton and Shaun White. Jake Burton back in 1977 had the vision for what snowboarding would be, but Shaun White had what it took to manifest that vision. Evidence has shown that time brings change in sports, history has repeated itself with snowboarding, this history reflects the time & changes that has occurred in America.
CAS 300 requires auditors to their audit using a risk based model where the nature, timing and extent of audit procedures are based on the assessed risk of material misstatement. Pickett (2006) argues that for audits to be effective and efficient, much of the audit effort should be focused on areas that are considered to pose the highest audit risk. Additional audit procedures should be linked to individual audit assertions whereas other audit procedures need to be performed as and when needed. Thus, for an audit plan to be put in place, it is necessary for an auditor to come up with a risk profile of the client comprising an understanding of the business operating by the audit client, assess business risk and also perform its preliminary analytical review.
f) To evaluate the material misstatement in the accounts, I think both of the consolidated income statement and the three financial statements are useful. We need to use the information properly from all the financial statements. However the consolidated income statement is the most useful one. If there is a significant change in an account balance comparing with preceding two years, the auditor will examine whether there a material misstatement exists. For instance, the bad debt expense as a percent of net sales in 2011, 2010 and 2009 are 0.56%, 0.70% and 0.69%, respectively. There should
al, 2012, p. 214). Therefore, a material misstatement may not be detected during the audit. In addition, the audit may not detect errors under the materiality level, whether resulting from error, fraud, or misappropriation of assets. Anderson, Olds, and Watershed may decline to express an opinion or issue a report if the firm is unable to complete the audit for any reason.
The audit team focused on preforming groundwork analytical procedures. A comparison of the performance of Smackey’s Dog Foods Inc to other similar industries was used to validate the original assessment of the risks. Performing the procedures helped detect areas that pose a high risk of the material misstatements. Another important part of the planning of the audit was to set a balance of materiality that is appropriate. The situations that
At the end all the risk are finance related, because the liability’s cost money and this will have an effect in the company’s earnings, so what is important is not only to try to avoid such events but also to be prepare in case they happen and have a plan, is like the saying “Hope for the best but be prepare for the worst”.
AAR can decrease as risk of misstatements on the Balance Sheet increases. External users may rely heavily on reported assets.
Potential for misstatement & fraud: Compliance with the established procedures and controls were found to be ineffective. The fraud reporting process, technically put in place does not serve its intended purpose. The ineffective control environment has created an attitude and tone across the company where errors and inappropriate behavior may be seen as acceptable, thus creating opportunity for concealing fraud and potential misstatements.
Fraud Risk: These weakness affects all levels of the internal control environment and other areas of the company. It shows that internal controls are not as important as meeting the company’s performance outlooks. If management does not openly display ethical conduct, the expectation of fraud and misappropriation
financial stable company; WB team has financial resources available to invest into growing opportunities, implement needed technology/processes and get the right people and tools
Following the risk assessment procedures, substantive procedures are designed and conducted to detect material misstatements of relevant assertions. Substantive procedures include analytical procedures and tests of details. Analytical procedures involve evaluations of financial statement information by a study of relationships among financial and nonfinancial data. Tests of details may be divided into three types. One test is the test of account balances to address whether there are misstatements in the ending balance of an account. In the case of Crazy Eddie, auditors should have put greater attention to inventory and accounts payable accounts. The second test is a test of classes of transactions to determine whether particular types of transactions have been properly accounted for during the period. Crazy Eddies fraudulently classified these transshipping transactions as retail sales to inflate its sales revenue and continue growth at existing stores. A key ratio for retailers is to compare growth in existing stores to growth from new stores. The third and final test is a test of disclosures to evaluate whether financial statement disclosures are properly presented. Crazy Eddie prepared bogus debit memos of over $20 million to understate accounts payable.