Flash Technologies, Inc. has recently engaged your firm to perform the annual audit for the year ending December 31, 2002. Flash has determined that their current auditors, Adams \& Adams LLP, cannot provide the international support that Flash now requires with their 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 2002 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 January 2003). On the following pages you will find (1) two memos from the audit manager of your firm to the planning files regarding background information and questions/concerns the client would like the firm to address, (2) industry articles, (3) industry ratios, and (4) the draft annual report for fiscal year 2002 that Flash has prepared.

REQUIREMENTS

1. Provide written recommendations in response to the issues the client has identified (see the "Client Issues" audit memo).
2. Perform a risk analysis and document your findings in a written report. A report like this would be used as a foundation document for engagement planning and client meetings. Using only the information provided in the case (e.g., memos, annual report, and articles) describe the key business risks Flash faces and the key audit risks posed to your audit firm by Flash. (Please focus primarily on factors that will influence acceptable audit risk and inherent risk.) In describing the key inherent risks, please be sure to discuss why a factor represents a risk, and then briefly discuss what implications that particular risk will have on the audit. Auditors are required to specifically assess the risk of material misstatement whether caused by error or fraud. The following AICPA Professional Standards may be useful references for your risk analysis: AU 311, "Planning and Supervision," AU 312, "Audit Risk and Materiality in Conducting an Audit," and 316, "Consideration of Fraud in a Financial Statement Audit." To help you identify critical risk factors, you may also wish to perform analytical procedures based on the company's financial data and general industry ratios.
Your firm demands polished, concise, professional analyses and writing. Be thorough, but get to the issues without unnecessary verbiage. In describing your analyses and conclusions, please consider relatively short, "punchy" or to-the-point sentences. Paragraphs will probably not contain more than about 5 sentences. You may want to organize your risk analysis around categories like General Areas of Risk (e.g., foreign ventures, etc.), Industry Risks, and Specific Financial Statement Risks (e.g., significant or unusual increases in ending balances). Please use headings appropriately and consider using bullet point listings. Exhibits should be referred to in the body of the report and should not include unnecessary detail. Your instructor will provide further guidance on the length and format of the report.

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Audit Schedule: A-8 Date: 1/16/03 Initials: ASG Flash Technology Inc. Memo to the Planning File by Audit Manager-General Information 12/31/02 General Background Information-Emanuel "Manny" Schwimez, is the CEO and chairman of the board of Flash. Mr. Schwimez is originally from Tel Aviv. He has an impressive resume, including a master's degree from the London School of Economics and many years of executive-level experience. He has led several high technology companies in the U.S. and abroad since the late 1960's. In 1989 he became president of Seatac Inc., a start-up company in Seattle, WA, which manufactured and sold font cartridges for printers. In 1991 Seatac agreed to merge with Boston Printing of Massachusetts. In 1992 the combined company was incorporated in Massachusetts as Flash Technology Inc., and began developing and commercializing font cartridges for laser printers. Headquarters for the company are in Binex, MA. Beginning in 1998, the company began to shift its emphasis from font cartridges to the growing PC card market. A PC card is a rugged, lightweight, credit card sized device inserted into a dedicated slot in a broad range of electronic equipment that contain microprocessors, such as portable computers, telecommunications equipment, manufacturing equipment and vehicle diagnostic systems. Although Flash Technology Inc., is still a relatively small player in the industry, it has enjoyed impressive success. The company's stock price has grown 300% over the last 3 years. In 2000 Flash's stock graduated to the New York Stock Exchange. The stock recommendation from analysts following Flash's stock is currently "strong buy." However, I did some market research and noticed short positions in Flash stock have increased during November and December 2002.