Question

Select two of the risks of material misstatements of PPE and Inventory. Assume that it is your role to discuss these risks for inclusion in the planning memorandum. Consider each matter separately. Then for each audit risk, identify the account or note, relevant assertion(s) and the quantitative and qualitative reasons why this matter has a greater risk of material misstatement. Use and explain ratios as part of your quantitative support. You may wish to organize your discussion as follows”

First part – BLUF – “bottom line up front”.– Briefly – what’s the misstatement concern?What is the ISSUE?

Second part – FACTS – what facts from the environment or from a qualitative point of view (such as your articles) provide evidence as to the concern?

Third part – ANALYSIS – what RATIOS provide evidence?OR, in what way is the note to the financial statement confusing or what piece are you skeptical about?

Fourth part – RULES – what accounting or audit rules are significant to this matter?What ASSERTION is in doubt?You can make references to your audit textbook or a financial reporting textbook or a source from the Web.

Fifth part – CONCLUSION – what two tests do you propose to address the audit risk? This is your audit plan.We can’t do any real testing.Consult your audit textbook to find substantive tests available to auditors.Tests can include obtaining from management a schedule of how they arrived at the amount and making inquiries as to the process and the basis for the estimates.Or, perhaps, as auditors, we will plan to re-calculate an amount and come up with our own independent estimate.