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Calibri (Body) 11 A A 29 Wrap Text v General Insert x Delete v Paste IUV MV Av E Merge & Center v $ ~ % 9 1.00 Conditional Format Cell Sort & Find & Formatting as lable Styles Format v Filter Select B C G H M N O P Q R U V You are a staff accountant assigned to the 2019 audit of ABC Electronics. ABC is a closely held corporation managed by the founder and principal shareholder, Adam B. Clark. Your firm has audited ABC for the last five years. The audited financial statements for the years ended December 31, 2018 and 2017 are presented below, with the client's unaudited financial statements for 2019. Additional Information: ABC manufactures and sells laptops and tablets. All sales are on credit to department stores and electronics wholesaling companies. Credit terms are net 30 days. ABC offers a one-year warranty covering manufacturing defects. ABC uses a periodic inventory system and determines its year-end inventory by taking a physical count on December 31. You and your supervisor 10 The interest rate on all debt is 8 percent. Annual interest and principal payments are due each December 1 INCOME STATEMENTS ($000's Years ended December 31 2019 2018 2017 Sales revenue $7,750 $7,713 $7,493 Cost of goods sold 5,505 5,381 5,225 Gross profit 2,245 2,332 2,268 Selling and general expenses 1,671 1,622 1,577 Depreciation expense 46 55 49 Warranty expense 75 65 55 Bad debt expense 90 85 90 Legal fees 43 14 12 Interest expense 119 127 135 Income before taxes 201 364 350 Income tax expense 19 109 104 Net income $182 $255 $246 The following schedule shows the sales revenue and components of costs of goods sold for each of ABC's two products. SCHEDULES OF GROSS PROFIT ($000's) Years ended December 3: 2019 2018 2017 Laptops Sales $4,880 $4,932 $4,791 Cost of goods sold: Materials 1,895 1,83 1,78 Labor 1,103 1.074 1,043 Overhead 689 664 662 Standard cost variances Depreciation 50 70 68 3,740 3,648 3,550 Gross Profit $1,140 $1,284 $1,241 Tablets 44 Sales $2,870 $2,781 $2,702 45 Cost of goods sold: 46 Materials 888 868 840 Sheet1Insert A A ap Wrap Text v General 2 Calibri (Body) 11 x Delete v MVAv Merge & Center v $ ~ % 9 00 .00 Conditional Format Cell Format v Sort & Find & Paste IUV Formatting as lable Styles Filter Select B C D E G M N P Q R U 40 3,740 3,648 3,550 Gross Profit $1,140 $1,284 $1,241 Tablets Sales $2,870 $2,781 $2,702 Cost of goods sold: Materials 88 868 840 Labor 537 532 505 Overhead 301 276 270 Standard cost variances -3 Depreciation 41 60 58 1,765 1,733 1,675 Gross Profit $1,105 $1,048 $1,027 54 55 BALANCE SHEETS ($000's) 56 31-Dec 2019 2018 2017 Cash $58 $165 $77 Accounts receivable 795 674 658 Bad debt allowance -70 -60 -60 Inventories: Raw materials (at cost) 322 304 286 Finished goods: (at standard) Laptops 86 738 710 Tablets 405 390 374 Prepaid expenses Current assets 2,381 2,213 2.049 Land 450 450 450 Building and equipment 1,865 1,858 1,831 Accumulated depreciation -89 -790 610 Total assets $3,801 $3,731 $3,720 Accounts payable $787 $675 $694 Taxes payable 16 14 13 Accrued interest 10 11 Warranty liability 40 40 40 Current portion of long-term debt 100 100 100 Current liabilities 952 839 858 Long-term debt 1,300 1,400 1,500 Total liabilities 2,252 2,239 2,358 Paid-in-capital 550 550 550 Retained earnings 999 942 812 Total stockholders'equity 1,549 1,492 1,362 Total liabilities and equity $3,801 $3,731 $3,720 Sheet1Calibri (Body) 11 A A = Wrap Text v General Insert v Delete Paste BIU A = = Merge & Center v $ ~ % 9 Conditional Format Cell Formatting as Table Styles Format v B C D E F G H K M N O Q R S 85 Required: The engagement partner has asked you to perform analytical procedures to identify potential risks and areas of audit focus in ABC Electronics's 2019 financial statements. Review the financial statements and identify accounts that appear to have unusual balances compared with the prior two years. 86 Prepare a written memorandum documenting: 87 The accounts whose balances appear anomalous and the reasons you identified them as such. 88 The potential accounting issues or operating problemsthat might have caused the unexpected fluctuations. 89 Particular aspects of the company's operations that you believe should receive special attention during the 2019 audit. 90 91 92 93 94 95 96 97 98 99 100 101 102 103 104 105 106 107 108 109 110
