Auditing chapter 5-57

Auditing

an audit client of Jones, CPA, for the past five years, is a manufacturer of various Approximately four years ago, Houseco developed a better toaster than had been available and sales took off, especially during the most recent two years, 20X7 and approximately 25 percent of the toaster market in the United States. In addition, the company manufactures other products, including vacuum 5-57. Houseco, household products. Approximately four years ago, 20X8. Currently, the company controls cleaners, floor polishers, and electric fondue po ts. Much of the increased sales performance is due to Donald Skaldon, who became the chief executive officer in 20X4. Donald and several other officers were able to accomplish a lever- aged stock buyout in 20X6. This seems to have worked out very well because Donald sug- gests that his net worth grew from less than $300,000 to well over $5 million due to increases in the value of the common stock he holds in the company. He is also excited because the company's unaudited results show earnings per share of $1.21, one cent more than the most optimistic analysts had projected. He points out to Jones that sales are up over 38 percent compared to the previous year and net income has increased by 54 percent. All is well. Jones is beginning the risk assessment analytical procedures for the 20x8 audit to obtain information to help plan the nature, timing, and extent of other audit procedures. More specifi- cally, he wants to identify areas that may represent specific risks relevant to this year's audit. Use the following Houseco balance sheet and income statement to identify accounts that may represent specific risks relevant to this year's audit. For each area, briefly note why you think it represents a risk. Houseco Balance Sheet Dollars (000s Omitted) 12/31/X7 Vertical Analysis 12/31/X Horizontal Analysis Audited) (Audited) (Unaudited) (Audited) (Audited) (Unaudited) (Audited) (Unaudited) Accounts receivable 14,402 9,182 8,049 9,757 Total inventories 9,762 74% Other current assets Total current assets Fixed assets (net) 1449 4,111 18,267 43,202 15,900 20% Total assets Liability and Equity Accounts payable Accrued liabilities Current portion L/T debt Income taxes payable 7,344 13,288 5,468 2.707 Total current liabilities 14,732 14,800 63% Deferred income taxes Total liabilities 30,217 49% 93% Common stock and equity Houseco Income Statement Dollars (000s Omitted) 12/31/X6 12/31/X7 12/31/X8 Vertical Analysis Horizontal Analysis 12/31/x6 12/31/x7 Audited) Gross sales Less: Returns and allowances Net sales Cost of goods sold Gross margin Sell, advertising, R&D expenses Income from operations Interest expense Income before taxes Income taxes Net income 78,428 (50% 76,144 100% 57,478 20,105 26% 112% 21,904 1,930 41% 3,807 4% Ratios Current Quick Receivable turnover Days' sales in ending receivables Inventory turnover Days sales in ending inventory Interest expense/Debt 3.2 76.0