t is August 2016 and you and your team members are a staff accountants assigned to the 2016 audit of Divergent Company. Divergent Company is a closely held corporation managed by the founder and principal shareholder, Adam B. Clark. Your firm has audited Divergent for the last five years. The audited financial statements for the years ended June 30, 2015 and 2014 are presented below, with the client's unaudited financial statements for 2016.Additional Information:Divergent manufactures and sells mini GPS locators and travel alarm clocks.All sales are on credit to department stores and electronics wholesaling companies. Credit terms are net 30 days.Divergent offers a one-year warranty covering manufacturing defects.Divergent uses a periodic inventory system and determines its year-end inventory by taking a physical count on June 30. You and your supervisor observed the count on June 30, 2016 and performed numerous test counts, but you have not performed further audit tests regarding inventory.The interest rate on all debt is 8 percent. Annual interest and principal payments are due each year on June 1st.

Required:The engagement audit senior has asked you and your team to perform analytical procedures to identify potential risks and areas of audit focus in Divergent Company's 2016 financial statements. Usually in practice you will be required to review the financial statements and identify all accounts that appear to have unusual balances compared with the prior two years. For this project, assume that your review was limited to the following areas: accounts receivable, inventory, interest expense, and legal expenses. Review these four areas and, for each of the four areas separately, document the following:The reasons why you believe the fluctuations are ok or require further investigation.The potential accounting issues or operating problems that might have caused the unexpected fluctuations, if any.Particular aspects of the company's operations that you believe should receive special attention during the 2016 audit.How long should the write-up be? One page max total (that's right, not one page for each of the four areas, but one page for all four areas combined), single-spaced. So you only turn in one page total. The idea is to bring up relevant points concisely and in good form. Assume that the audit senior on the job wants you to brief her on the risks and why they are risks, but doesn't want a lot of fluff as she is a very busy person.

Just audit the accounts receivable, need the steps

INCOME STATEMENTS ($000's) Years ended June 30 2016 2015 2014 Sales revenue $ 7,750 $ 7,713 $ 7,493 Cost of goods sold 5,545 5,381 5,225 Gross profit 2,205 2,332 2,268 Selling and general expenses 1,671 1,622 1,577 Depreciation expense 56 55 49 Warranty expense 75 65 55 Bad debt expense 90 85 90 Legal fees 43 14 12 Interest expense 110 127 135 Income before taxes 160 364 350 Income tax expense 47 109 104 Net income $ 113 $ 255 $ 246 Dividends paid $ 125 $ 125 $ 100 The following schedule shows the sales revenue and components of costs of goods sold for each of Divergent's two products. SCHEDULES OF GROSS PROFIT ($000's) Years ended June 30 2016 2015 2014 Mini GPS locators Sales $ 4,880 $ 4,932 $ 4,791 Cost of goods sold: Materials 1,895 1,835 1,781 Labor 1,103 1,074 1,043 Overhead 689 664 662 Standard cost variances 3 5 (4) Depreciation 70 70 68 3,760 3,648 3,550 Gross Profit $ 1,120 $ 1,284 $ 1,241 Travel alarm clocks Sales $ 2,870 $ 2,781 $ 2,702 Cost of goods sold: Materials 888 868 840 Labor 537 532 505 Overhead 301 276 270 Standard cost variances (2) (3) 2 Depreciation 61 60 58 1,785 1,733 1,675 Gross Profit $ 1,085 $ 1,048 $ 1,027 2016 30 $ $ 2015 165 $ 674 (60) 2014 77 658 (60) 795 (70) 322 304 286 710 374 4 BALANCE SHEETS ($000's) June 30 Cash Accounts receivable Bad debt allowance Inventories: Raw materials (at cost) Finished goods: (at standard) Mini GPS locators Travel alarms Prepaid expenses Current assets Land Building and equipment Accumulated depreciation Total assets Accounts payable Taxes payable Accrued interest Warranty liability Current portion of long-term debt Current liabilities Long-term debt Total liabilities Paid-in-capital Retained earnings Total stockholders'equity Total liabilities and equity 863 405 8 2,353 450 1,865 (945) 3,723 $ 787 $ 16 738 390 2 2,213 450 1,858 (790) 3,731 $ 675 $ $ $ 2,049 450 1,831 (610) 3,720 694 13 11 40 100 858 14 10 40 100 1,500 40 100 943 1,300 2,243 550 930 1,480 3,723 $ 839 1,400 2,239 550 942 1,492 3,731 $ 2,358 550 812 1,362 3,720 $