Write a brief one-page memo identifying significant issues we should communicate to the audit committee and put it in the A-series audit documentation. For each of the estimates noted above, determine (calculate) the auditor’s “range of reasonableness estimate.” Do the company’s estimates produce a bias toward overstatement or understatement of income (before income taxes and after income taxes)? Explain the relative size of the bias amounts in comparison to 

(1) income in the unaudited financial statements, and 

(2) income in the adjusted financial statements, taking the proposed adjustments into account.

The company incorporated several estimates in its current year financial statements. Auditing standards require consideration of individual estimates and consideration of all estimates taken together. The audit objective is to determine whether the estimates contribute a material management bias when determining net income. I know that Apollo uses at least the following estimates that affect bottom-line numbers:

• Allowance for Doubtful Accounts Receivable. Has the company reserved enough for uncollectible accounts?
• Depreciable Assets. The company acquired and placed in service new equipment during the year. Depreciation was calculated on a straight-line basis, with zero salvage, for periods specified by company policy. Are the useful lives appropriate and salvage values reasonable?
• Inventory Obsolescence. Has Apollo reserved an appropriate amount for potential obsolescence in its inventory? Is there inventory that has little or no marketable value?
• Warranty Expense. Has Apollo reserved an appropriate amount for warranty expense? Have the amounts (especially as a percentage of sales) been stable or changed significantly?

In addition to the above estimates, auditing standards require us to communicate other significant items that we found during the audit to the audit committee. For each of these items, provide a brief summary so we can prepare our formal communication.

  

 

 

3. Accounts Receivable Accounts Receivable consists of the following at December 31: in thousands Trade Receivables Employee and Officer Receivables Less Allowance for Doubtful Accounts Net Accounts Receivable Amount charged to bad debt expense for the year ended December 31, 2016 was $1,622. Write- offs for the year were approximately the same. 4. Inventories Inventories consist of the following at December 31: in thousands Siren Speaker Spotlight 2016 $16,411 0 16,411 (1,263) $ 15,148 Less Reserve for Inventory Obsolescence Ending Inventory 2016 $3,098 9,571 6,156 18,825 (3,012) $15,813