Your firm has been approached by a company desiring to change from their current Big-4 CPA firm to a regional firm to save over $100,000 in annual audit fees. The potential client is a privately owned producer of private label garments in the highly competitive sector, which sells primarily to major retailers such as Wal-Mart, Kmart, Sears and JC Penney. The company has experienced some financial difficulties in the past year, which could lead to its major line of credit being pulled if it does not make a profit.
In performing some preliminary analytical procedures, you noted some of the following changes in accounts related to accounts receivable:
|% of accounts receivable current||72%||65%|
|No. of days’ sales in accounts receivable||63||41||43|
|Days’ sales in inventory||72||45||47|
|Times interest earned||1.40||5.70||6.50|
You also noticed the addition of a large account called “other assets” on the balance sheet.
When you inquire about the balances, the president has explanations for the changes. The other assets are old equipment that the company was previously depreciating, but they purchased new computerized production equipment during the year. They have not discarded the old equipment yet because they might use it if demand increases beyond the capacity of their current equipment. They merely wanted to move the equipment out of fixed assets for the current period since the equipment is not being depreciated.
The new computer equipment is also the explanation for the improved margins. By automating production beyond previous automation levels, they have been able to reduce labor costs and increase margins. This increased production capacity has also allowed them to increase inventory over levels in previous years.
The changes in accounts receivable are also tied to the new computerized manufacturing equipment. Since they now have ability to produce more garments more quickly than in the past, they can offer their customers a wider selection of products. Some of the customers returned some goods in exchange for the new products, so they were rebilled for the new deliveries. Having more time to pay for the goods since they were rebilled makes it appear that there are more days in accounts receivable.
There are many risks associated with accepting new clients, especially if the clients could be in financial distress. The reason behind planning analytical procedures is to identify areas of heightened risk of misstatement and then plan the audit to determine whether potential explanations satisfy all the unexpected changes that are observed in the account balances. Further, it is important to be skeptical of management-provided explanations.
Your paper should meet the following requirements:
Include at least two or three outside sources. The CSU-Global Library is a great place to start.
101papers.com is always working towards customer satisfaction. Our professional academic writers always aim at producing comprehensive papers that possess quality and originality at pocket-friendly prices. Students are assured that all their private information is safe with us.
101papers.com provides a system where students can request for money-back in case they cancel the order or in the rare instances of dissatisfaction. The refund policy adheres to the company’s term and conditions on money-back.Read more
While providing the best professional essay writing services, we guarantee all our students of plagiarism-free papers. All papers produced by our professional academic writers are checked against all web resources and previously completed papers to avoid plagiarism.Read more
In our urge to provide the best professional essay writing services, we guarantee students of free revision policy. The free revision policy is a courtesy service where students can request for unlimited for their completed papers. We always aim at achieving 100% customer satisfaction rates. The free revision policy is one among many of our major advantages.Read more
At 101papers.com, every student is entitled to total security. Our professional academic writers are always committed to protecting all private information of our customers. We do not share any personal information with third parties. Additionally, we provide safe systems for all online transactions.Read more
Working with us is the greatest step towards achieving all your academic goals. We always deliver the best professional essay writing services as promised. We, therefore, expect all students to work cooperatively with us, as we work towards achieving our goal, your satisfaction. This way, all services will be delivered accurately and on time.Read more