Principles of Auditing

Your client, General Television, Inc. manufactures televisions and during the current year acquired Micro Engineering, Inc., which manufactured flat panel plasma screens for computers so that it could compete in the market for flat panel televisions. Following is a list of several risks that have been identified in the audit of this television manufacturer. 1. General Television has strong internal controls over existence of inventory. It has a good perpetual inventory system and regularly compares inventory on hand with the perpetual records. 2. Prices have been changing rapidly in General Television's marketplace. Although the market place is relatively stable for traditional televisions, the prices on flat panel televisions have become much more competitive. 3. General Television had to pay a premium to acquire Micro Engineering. General Television had independent appraisers of the fair value of the assets and has determined that about 35 percent of the purchase price should be allocated to goodwill. Required: In a memo format, answer the following questions for risks described in 1, 2, and 3 above. Treat each case independent from one another. a) Identify the relevant assertion. b) Does this assertion represent a significant inherent risk? Explain. c) How might you respond to this risk in terms of staffing decisions? d) How might you respond to this risk in terms of nature of audit tests? e) How might you respond to this risk in terms of timing of audit tests? f) How might you respond to this risk in terms of extent of audit tests