I. The auditor is trying to determine whether to use a horizontal or vertical analysis. In the analytic to be performed the auditor wants to understand whether the numbers as presented are reasonable. a. The auditor decided to perform a horizontal analysis why did the auditor decide to so this instead of a vertical analysis? b. For the balance sheet and income statement prepare a horizontal analysis (Do not perform this for the statement of cash flows). II. Focus on the areas we have covered in class Cash, Account Receivables, accounts payable, inventories- a. For each of the 4 areas above what ratios would you consider relevant to calculate and evaluate as part of the audit (determine at least one ratio for each of the 4 areas). b. For the ratio determined for each area above- calculate the ratio for both years and analyze any trends, are they positive, negative, or neutral changes? III. Note that the engagement team wants to be efficient with their audit and wanted to do perform a reasonableness analytic to determine some of the balances. Marilyn Terrill is the senior auditor for the audit. In planning the audit, Marilyn is attempting to develop expectations for planning analytical procedures based on the financial information for prior years and her knowledge of the business and the industry. Overall Materiality $500K Tolerable misstatement $375K, and deminimis $38K, note materiality was based on total revenue. 1) For her analytic she is trying to decide between overall materiality, tolerable materiality, or deminimis materiality to use to evaluate differences between your expectation and actual results, a. Decide which materiality level is appropriate for her to use b. & explain why. For questions 2, 3, and 4 below assume you dont know the actual number for 20X8, and estimate what you would have expected it to be based on the trend information provided, and then compare the estimate you come up with to the actual information above. Determine whether the difference between your estimate and the actual results is material and would require additional work. (Focus on whether the dollar amount of the difference is above a materiality level decided above.) For each question below answer the following questions: (a)Show your calculation, and the formula you used (ex: Sales/Accounts receivable= 111/222=.5), (b)your answer (ex: .5 per above) (c) compare your answer to materiality threshold determined (based on your answer to question 1 above) (c)if any differences noted- determine whether they are material or not (based on your answer to question 1 above), and (d)finally make a conclusion about whether you believe this account is misstated or appears reasonable. 2) REVENUE/SALES- Based on economic conditions, she believes that the increase in sales for the current year should approximate the historical trend. (Revenues were 20x6: $11,814 20x5: $9,500, 20x4: $7,800) (Industry sales have been increasing by double digits for the last five years, competitor sales increases have ranges from 10-30% increases year over year for the last 5 years.) Using a reasonableness analytic estimate expected revenue for 2018 using the historical data provided. 3) Based on her knowledge of economic conditions, she is aware that the effective interest rate on the company's Long-term debt, less current maturity for 20X8 was approximately 11 percent. She is aware that the company pays little to no interest on the current portion of the long-term debt. Long-term debt, less current maturity is the companys only debt, and source of interest expense. Using a reasonableness analytic estimate expected interest expense for 20X8. (Show your calculation, your answer, and if any differences noted are material or not, conclude whether you believe this account is misstated or appears reasonable.) 4) She noted that Product development expense consists primarily of salary to employees. She noted that there were about 10 employees who work in this department and all are paid about the same salary in 20x7. Note that no employees were fired or hired in 20x8. Each employee received a salary increase of about 1%. No other significant changes were noted in this department. Inflation was steady during the period. Using a reasonableness analytic estimate Produce development expense for 20x8. IV. Answer the following questions: (choose one answer below and explain rationale why an answer without an explanation will result in no credit). Do not use the materiality from section IV above to make decisions, focus on both qualitative and quantitative factors. 1) The most likely misstatement in the financial statements is (choose one answer and explain why): a. The increase in cash in 20X8. b. Treatment of impaired intangible assets as an expense in 20X8. c. Treatment of common stock issued as an adjustment to net income (loss) under cash flow from operations. d. An income tax benefit on the income statement as contrasted to income tax expense. 2) Which of the following is the most unexpected change on the balance sheet, if one assumes the revenue increase in 20X8 is correct? (choose one answer and explain why) a. Decrease in prepaid advertising expenses. b. Increase in accounts payable. c. Decrease in deferred revenues. d. Increase in common stock. 3) Which of the following is most likely to lead the auditors to question whether DietWeb has the ability to continue as a going concern? (choose one answer and explain why) a. The net loss incurred in 20X8. b. The decrease in cash that occurred in 20X8. c. Increases in fixed assets during 20X8. d. Mr. Readings serving as both CEO and chairman of the board of directors. 4) Which of the following changes that have been recorded seems most unexpected? (choose one answer and explain why) a. The decrease in fixed assets. b. The decrease in prepaid expenses and other current assets. c. An increase in cash during a year in which there is a net loss. d. An increase in accrued liabilities, given the large increase in sales.

DietWeb Inc. (hereafter DietWeb) was incorporated and began business in March of 20X1, seven years ago. You are working on the 20X8 audit-your CPA firm's fifth audit of DietWeb. Analyze the following financial statements and reply to each of the questions that follow. DietWeb, Inc. BALANCE SHEET December 31, 20X8 and 20X7 (in thousands) 20x8 20X7 $3,019 $1,050 485 450 59 609 175 230 3,738 2,339 3,321 3,926 $7,059 $6,265 Assets Current assets Cash and cash equivalents Trade receivables Prepaid advertising expenses Prepaid expenses and other current assets Total current assets Fixed assets, net Total assets Liabilities and shareholders' equity Current liabilities Accounts payable Current maturities of notes payable Deferred revenue Other current liabilities Total current liabilities Long-term debt, less current maturity Accrued liabilities Deferred tax liability $1,070 42 1,973 171 3,256 34 792 15 $ 909 316 1,396 12 2,633 176 690 145 DietWeb Inc. (hereafter DietWeb) was incorporated and began business in March of 20X1, seven years ago. You are working on the 20X8 audit-your CPA firm's fifth audit of DietWeb. Analyze the following financial statements and reply to each of the questions that follow. DietWeb, Inc. BALANCE SHEET December 31, 20X8 and 20X7 (in thousands) 20x8 20X7 $3,019 $1,050 485 450 59 609 175 230 3,738 2,339 3,321 3,926 $7,059 $6,265 Assets Current assets Cash and cash equivalents Trade receivables Prepaid advertising expenses Prepaid expenses and other current assets Total current assets Fixed assets, net Total assets Liabilities and shareholders' equity Current liabilities Accounts payable Current maturities of notes payable Deferred revenue Other current liabilities Total current liabilities Long-term debt, less current maturity Accrued liabilities Deferred tax liability $1,070 42 1,973 171 3,256 34 792 15 $ 909 316 1,396 12 2,633 176 690 145