Question
The risk assessment should be presented as a memo to file. The memo should identify the users of the financial statement and their reliance on
The risk assessment should be presented as a memo to file. The memo should identify the users of the financial statement and their reliance on the financial statements, the likelihood of the client having financial difficulties, and the integrity of management.
Next, your memo will establish the acceptable audit risk as low, medium, or high, with a justification for your selection. The memo should then address the inherent risk and the associated account(s) with each of the 11 situations discussed in the problem.
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| 2011 |
| 2010 |
| 2009 |
ASSETS | Dollar Value |
| Dollar Value |
| Dollar Value |
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CURRENT ASSETS |
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Cash and cash equivalents | $ 7,721,279 |
| $ 7,324,846 |
| $ 8,066,545 |
Accounts receivable: Trade | 14,008,633 |
| 9,586,325 |
| 8,879,352 |
Less: Allowance for bad debts | (966,468) |
| (966,468) |
| (942,943) |
Inventory | 32,236,021 |
| 25,537,198 |
| 25,271,503 |
Prepaid expenses | 119,081 |
| 106,353 |
| 102,650 |
Deposits | 53,197 |
| 36,853 |
| 29,092 |
Total current assets | 53,171,743 |
| 41,625,107 |
| 41,406,199 |
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PROPERTY, PLANT, AND EQUIPMENT |
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Land | 11,490,036 |
| 11,490,036 |
| 4,159,580 |
Automobiles | 266,071 |
| 220,313 |
| 220,313 |
Accum. depreciation: Automobiles | (198,218) |
| (166,835) |
| (122,769) |
Office equipment | 5,494,707 |
| 5,238,368 |
| 4,924,055 |
Accum.depreciation: Office equipment | (2,962,472) |
| (2,136,395) |
| (1,417,025) |
Manufacturing equipment | 13,918,820 |
| 11,543,824 |
| 11,179,813 |
Accum. depreciation: Manufacturing equipment | (3,319,983) |
| (2,796,754) |
| (2,429,272) |
Manufacturing building | 41,106,800 |
| 38,056,625 |
| 38,056,625 |
Accum. depreciation: Manufacturing building | (11,098,836) |
| (8,410,681) |
| (7,074,110) |
Office building | 13,262,479 |
| 13,025,447 |
| 13,025,447 |
Accum.depreciation: Office building | (5,696,357) |
| (4,428,418) |
| (2,253,925) |
Total property, plant, and equipment | 62,263,047 |
| 61,635,530 |
| 58,268,732 |
TOTAL ASSETS | $ 115,434,790 |
| $ 103,260,637 |
| $ 99,674,931 |
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LIABILITIES AND STOCKHOLDERS' EQUITY |
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| - |
| - |
CURRENT LIABILITIES |
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Note payable: Bank | $ 11,459,080 |
| $ 10,257,598 |
| $ 9,631,600 |
Accounts payable: Trade | 12,969,686 |
| 9,460,776 |
| 7,586,374 |
Current portion of long-term debt | 3,916,739 |
| 41,070 |
| 41,070 |
Accrued payroll and withholding taxes | 1,593,276 |
| 1,263,461 |
| 1,238,454 |
Accrued interest | 229,575 |
| 196,545 |
| 178,478 |
Federal income taxes payable | 244,792 |
| 307,354 |
| 265,619 |
Total current liabilities | 30,413,148 |
| 21,526,804 |
| 18,941,595 |
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LONG-TERM DEBT | 24,420,090 |
| 22,342,006 |
| 22,379,920 |
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STOCKHOLDERS' EQUITY |
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Common stock: $1 par value |
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Authorized: 1,500,000 shares |
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Issued and outstanding: 1,000,000 shares | 1,000,000 |
| 1,000,000 |
| 1,000,000 |
Additional paid-in capital | 15,717,645 |
| 15,717,645 |
| 15,717,645 |
Retained earnings | 43,883,907 |
| 42,674,182 |
| 41,635,771 |
Total stockholders' equity | 60,601,552 |
| 59,391,827 |
| 58,353,416 |
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| - |
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ 115,434,790 |
| $ 103,260,637 |
| $ 99,674,931 |
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| 2011 |
| 2010 |
| 2009 |
| Dollar Value |
| Dollar Value |
| Dollar Value |
Sales | 150,918,731 |
| 148,764,555 |
| 144,860,245 |
Sales Returns and Allowances | 181,103 |
| 178,518 |
| 173,832 |
Cost of Sales* | 109,284,780 |
| 106,255,499 |
| 101,988,165 |
Gross Profit | 41,452,848 |
| 42,330,538 |
| 42,698,248 |
OPERATING EXPENSES-Allocated |
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Salaries-Management | 2,281,266 |
| 2,387,993 |
| 2,295,081 |
Salaries-Office | 315,169 |
| 296,681 |
| 306,856 |
Licensing and certification fees | 190,650 |
| 172,883 |
| 162,279 |
Security | 550,603 |
| 637,580 |
| 630,353 |
Insurance | 93,197 |
| 103,842 |
| 108,491 |
Medical benefits | 23,721 |
| 29,453 |
| 28,810 |
Advertising | 162,512 |
| 178,009 |
| 165,678 |
Business publications | 6,989 |
| 5,555 |
| 774 |
Property taxes | 22,585 |
| 178,009 |
| 175,692 |
Bad debts | 841,699 |
| 1,034,060 |
| 992,094 |
Depreciation expense | 5,336,783 |
| 4,641,982 |
| 4,367,565 |
Accounting fees | 273,956 |
| 297,777 |
| 299,789 |
Total operating expenses-Allocated | 10,099,130 |
| 9,963,824 |
| 9,533,462 |
OPERATING EXPENSES-Direct |
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Salaries-Sales | 14,970,669 |
| 15,327,777 |
| 14,904,392 |
Wages Rental | 491,794 |
| 595,389 |
| 575,725 |
Wages-Mechanics | 1,113,539 |
| 1,339,626 |
| 1,333,411 |
Wages-Warehouse | 4,891,065 |
| 5,340,271 |
| 5,473,249 |
Garbage collection | 27,649 |
| 29,771 |
| 37,969 |
Payroll benefits | 2,657,889 |
| 2,937,730 |
| 2,894,300 |
Rent- Warehouse | 802,855 |
| 764,346 |
| 758,345 |
Telephone | 32,402 |
| 45,173 |
| 57,867 |
Utilities | 262,393 |
| 267,005 |
| 274,365 |
Postage | 89,763 |
| 133,518 |
| 151,278 |
Linen service | 17,282 |
| 12,350 |
| 16,083 |
Repairs and maintenance | 166,985 |
| 168,405 |
| 178,213 |
Cleaning service | 89,800 |
| 81,589 |
| 78,088 |
Legal service | 396,016 |
| 190,540 |
| 152,238 |
Fuel | 286,547 |
| 341,192 |
| 279,512 |
Travel and entertainment | 103,389 |
| 103,842 |
| 100,479 |
Pension expense | 228,555 |
| 237,350 |
| 127,011 |
Office supplies | 149,828 |
| 148,340 |
| 171,109 |
Miscellaneous | 300,188 |
| 105,931 |
| 144,012 |
Total operating expenses-Direct | 27,078,608 |
| 28,170,145 |
| 27,707,646 |
Total Operating Expenses | 37,177,738 |
| 38,133,969 |
| 37,241,108 |
Operating Income | 4,275,110 |
| 4,196,569 |
| 5,457,140 |
Other Expense-Interest | 2,181,948 |
| 2,299,217 |
| 2,397,953 |
Income Before Taxes | 2,093,162 |
| 1,897,352 |
| 3,059,187 |
Federal Income Taxes | 883,437 |
| 858,941 |
| 1,341,536 |
Net Income | 1,209,725 |
| 1,038,411 |
| 1,717,651 |
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