Steven Hobbs
Accounting 439
Assignment 8
11272870
9-47: A. In expecting that an audit client’s performance should be similar to a competitor, it is important to evaluate the prior year’s performance, and the competitor’s performance for that year. If the industry is in a high growth phase, or if it is a period of decline in the industry, the client should have similar results to its competitor. If the results differ, it should be investigated as to what caused the disparity. In this situation, the accounts receivable balance is a good example of this. In the prior year, the client had an AR of 3.3, and the year before an AR of 2.3, an increase of 44%, and to the current year an increase of 106% to 6.8, that coupled with the competitor’s balance of 4.2 it a serious red flag.
B. Some of the unexpected results such as higher A/R, lower sales, and higher number of days sales in ending inventory and number of days sales in receivables could be a large volume of sales at deep discounts. By selling a large volume at a discount, accounts receivable would increase, inventory would increase in anticipation of large volume sales, and days sales in receivables would increase as a result as well.
C. In determining the accuracy and validity of the data, one would inspect source documents and recalculate/reperform the client’s calculations.
D. In order to embezzle cash, the CFO could increase inventory levels on paper and establish a false vendor to pay for the nonexistent goods. Additionally, the CFO could Increase accounts receivable to represent the sale of false goods and operate it sort of like a Ponzi scheme where payments coming in are applied to other accounts.
E. Professional skepticism is important when performing and planning analytical procedures because it causes all information to be looked at with a non-biased attitude. It ensures the entire business