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Case 3

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Mafel Labadan
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123 views

Case 3

Uploaded by

Mafel Labadan
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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C A S E

M S. B ·F A. B ·S M. G ·D F. P

LE AR NI NG O BJ E CTI V ES
After completing and discussing this case you should be able to
[1] Identify and understand the implications of key [3] Appreciate the degree of professional judgment
inherent and business risks associated with a involved in analyzing risk related to the audit of
new client a rapidly growing company in a high technology
[2] Understand and link audit-client's risk to industry
accounts, assertions, and the audit plan

INTRODUCTION
Flash Technologies, Inc. has recently engaged your firm to perform the annual audit for the year
ending December 31, 2014. Flash has determined that its current auditors, Adams & Adams LLP,
cannot provide the international support that Flash now requires with its increased investment in
Korea and Canada. Partners from your firm have discussed the prior audits with the engagement
partner at Adams & Adams, and everything seems to be in order. Your firm also met with executives
at Flash in December 2014 and January 2015 and a verbal (but informal) agreement was reached
regarding fees, timing, scope, etc. Your firm has decided that additional analyses are needed before
finalizing the details of the engagement (assume that it is now late January 2015). On the following
pages you will find (1) a memo from the audit manager of your firm to the planning files regarding
background information, (2) an industry article, (3) industry ratios, and (4) the draft annual report
for fiscal year 2014 that Flash has prepared.

The case was prepared by Mark S. Beasley, Ph.D. and Frank A. Buckless, Ph.D. of North Carolina State University and Steven M. Glover, Ph.D. and
Douglas F. Prawitt, Ph.D. of Brigham Young University, as a basis for class discussion. It is not intended to illustrate either effective or ineffective
handling of an administrative situation.

© 31
R E Q U I RED
[1] Perform a risk analysis of Flash Technologies and document your findings in a written report.
Use the two-part solution template provided on the next two pages (an electronic version of
the template is available on www.pearsonhighered.com/beasley). The template is organized
by General Business and Industry Risks (e.g., foreign ventures, high tech, etc.) and Financial
Accounting/Reporting Risks (e.g., unusual ratios or significant increases in balances). Using
only the information provided in the case (e.g., memo, annual report, and article), identify key
business objectives and strategies and then map those on the template from business risks to the
potential effect on the audit plan.
Auditors are required to specifically assess the risk of material misstatement whether caused by
error or fraud. The AICPA’s and PCAOB’s “Risk Assessment Standards” may be useful source
materials for your risk analysis. In addition, to help you identify risk factors, you should also
perform analytical procedures based on the company’s financial data and compare those results
to your expectations and general industry ratios and trends. You may attach your analytical
procedures to the solution template. Please provide polished, concise, professional analysis and
writing. Get to the issues without unnecessary verbiage.

PRO FES S I ON AL JUDG MENT Q UEST I ON S


It is recommended that you read the Professional Judgment Introduction found at the beginning of
this book prior to responding to the following questions.
[2] Describe how the confirmation tendency might affect auditors' risk assessments. Describe some
strategies to mitigate potential bias caused by this tendency.
[3] What "judgment frames" does management of Flash use when discussing the company's
performance and prospects? How might judgment framing be used to boost professional
skepticism in performing a risk assessment?

32 © 2015 Pearson Education, Inc.


You will find an electronic version of the following template at www.pearsonhighered.com/beasley

SU GG E STED F OR MAT FO R FLA SH TEC H NO LO GI ES MEMO


GENERAL BUSINESS AND INDUSTRY RISKS
As illustrated in the table below, provide an analysis of business objectives and strategies and how they map to business risk, audit risk, related
accounts, and their potential effect on the audit plan. For the two business objectives illustrated below, identify one or two additional risks
associated with each objective and complete the remaining columns for all risks (note that the template has been partially completed).

© 2015 Pearson Education, Inc.


ADDITIONAL GENERAL AND INDUSTRY RISKS
Provide a list of additional general and industry risks you identified. Only list the risk, no need to fill out a table as shown above. You should
identify at least three additional risks beyond those listed in the table above and provided in the example immediately below:
DCI experiencing losses
There is pressure to increase sales to be a leader in the flash memory market
Identify at least three additional general/industry risks…

33
FINANCIAL ACCOUNTING/REPORTING RISKS
Fill in the table below by completing the final box for the first risk and by identifying two additional financial accounting/reporting risks
through examination of Flash’s financial statements and related disclosures (e.g., significant or unusual increases in ending balances, unexpected
patterns such as slower growth in accounts receivable than sales, unexpected differences between Flash’s ratios and the industry averages). The
two additional risks included in the table below should be the financial accounting/reporting risks you consider most significant.
© 2015 Pearson Education, Inc.

ADDITIONAL FINANCIAL ACCOUNTING/REPORTING RISKS


Provide a list of additional financial accounting/reporting risks you identified. You need only list the risk, no need to fill out a table as shown
above. You should identify at least three additional risks beyond those listed above.
Identify at least three additional financial accounting/reporting risks…
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