Address the following question to the best of your ability. Your answers should be well-organized and written in complete, well-written sentences. The use of bullet points within a complete sentence is acceptable.

Your client, Standard Company, manufactures personal computers. During the planning phase of the audit you learned the following:

The company has been a leader in the market, but over the last two years its market share has been declining. During the current year it cut back from three shifts to two shifts because of the decreased demand.

All sales are made on normal credit terms of 2/10, n30. Consignment arrangements are unusual in this industry and the company has never utilized them.

Standard has continued to fill customer orders and ship merchandise at a pace consistent with two shifts a day. Inventory quantities have decreased, and the company has eliminated the backlog of orders that existed in prior years.

Consumer magazines indicate that the companys basic model does not have the new technological features that buyers are looking for.

A small handful of dealers have experienced financial difficulties because of the slowing sales of Standard computers.

No changes have been made in to Standards sales terms; however they have relaxed their credit policy. There is no right of return.

During your work to understand the companys internal controls related to the sales and production cycle you learned the following:

Management has been very conscious about reporting accurate earnings.

Employee turnover has been minimal, and the company has succeeded in retaining competent personnel. The only turnover during the last year has been the CFO who was replaced by a CPA that has significant industry experience. The company was pleased to obtain an individual with such experience because she will have responsibility for developing many significant accounting estimates.

Before processing any customer purchase orders, the system automatically verifies that the customer is not over their credit limit.

Standard has placed in operation programmed control procedures such that the sales are automatically recorded upon shipment of the goods with a common carrier. As part of recording the sale, the system verifies that there is a customer purchase order for the items shipped. Additionally quantities on every sales invoice are checked against shipping documents and prices are checked against the master price file. Manual follow-up procedures appear to be effective based on procedures performed to understand the system of internal controls.

Good physical controls also exist over inventory, and warehouse employees diligently use the companys system to input shipments and receipts of inventory on a timely basis.

With respect to the existence of gross accounts receivable, indicate whether you believe each aspect of the risk model is lower or higher based upon the information provided below. The level of audit risk has already been set by the partner on this engagement Format Audit Risk Inherent Risk Control R is a) Identify the level risk you believe is Low (set by the audit partner) correct given the information above (e.g,Low, Moderate, High, Maximum). b) Provide support for the level of risk selected above using information included in the facts. high Highly material account low c) Given your analysis i) A primarily substantive approach emphasizing detailed tests of transac above, underline ii) Lower assessed level of control risk therefore emphasizing tests of cor above) the audit ) Lower assessed inherent risk therefore emphasizing analytical proced approach, from these three options, you believe is most appropriate for the EXISTENCE of accounts receivable With respect to the existence of gross accounts receivable, indicate whether you believe each aspect of the risk model is lower or higher based upon the information provided below. The level of audit risk has already been set by the partner on this engagement Format Audit Risk Inherent Risk Control R is a) Identify the level risk you believe is Low (set by the audit partner) correct given the information above (e.g,Low, Moderate, High, Maximum). b) Provide support for the level of risk selected above using information included in the facts. high Highly material account low c) Given your analysis i) A primarily substantive approach emphasizing detailed tests of transac above, underline ii) Lower assessed level of control risk therefore emphasizing tests of cor above) the audit ) Lower assessed inherent risk therefore emphasizing analytical proced approach, from these three options, you believe is most appropriate for the EXISTENCE of accounts receivable