Question
You are an audit manager with Henkel and Marchant, CPA and have been tasked with planning the audit of Bits and Bytes Inc. (BBI), a
You are an audit manager with Henkel and Marchant, CPA and have been tasked with planning the audit of Bits and Bytes Inc. (BBI), a mid-size company that specializes in the sale of quality new and used computers. Important information regarding BBI's inventory and accounts receivable is provided below: Inventory BBI stores its inventory in a warehouse located across town. Security at the warehouse has been an issue in recent months, and BBI staff have forgotten to secure the warehouse at night on more than one occasion. Three years ago, a large national retailer of consumer electronics recently opened up across the street from BBI. BBI's sales have been steadily decreasing and much of BBI's new and used computer inventory has been sitting in the warehouse for over two years. Accounts Receivable During the BBI audit planning meeting, your audit partner indicated that BBI is under significant pressure to improve net income, resulting in a risk that BBI has recorded fictitious credit sales. Nine months ago, BBI relaxed its customer credit policy which resulted in an initial surge in credit sales. Unfortunately, BBI has had difficulty in collecting many of the larger accounts receivable balances. Because BBI is confident that the accounts receivable balances will eventually be collected, the company has chosen not to write off any of the accounts. Required: For BBI's inventory and accounts receivable, identify two areas of risk of material misstatement and the related assertion(s), and describe one substantive procedure to address each area of risk.
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