The following facts represent the audited financial statements of a public company for 2011 and 2010, along with management's representation regarding the unaudited amounts (i.e., the UNAUDITED column) and the auditors' projected amounts for 2012 (i.e., the PROJECTED column, which represents their expectations based on industry trends and information that they know about this company's likely financial performance). In addition, financial ratios are presented that summarize the relationships among the various financial statement line items reported in the balance sheet and income statements.

The company is in the telecommunications industry, has been in existence for ten years, and has had unqualified audit opinions throughout that time. The company has generally been successful in maintaining a competitive advantage in the industry, but there is always intense competition and maintaining that advantage (and associated profitability, etc.) continues to be a significant challenge. Assume that you are the audit senior who is considering the planning for this year's audit engagement.

Required

Part 1. Review the financial statements and document the financial trends that seem most important for this company.

Part 2. Describe the patterns in the data that concern you, and explain why those particular patterns cause you concern.

Part 3. Brainstorm to consider possible errors in the financial data that might be consistent with the patterns you identified in Part 2.

Part 4. Considering the results of Part 3, discuss the specific financial statement line items that should receive heightened scrutiny during your audit of this company.

Part 5. Consider the PROJECTED column. Why would it be helpful for auditors to make projections of unaudited data based on industry trends and analysis? How would an auditor actually make such a projection? What could be a downside risk in making such projections?

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PROJECTED UNAUDITED 12/31/12 12/31/12 12/31/11 12/31/10 ASSETS Cash Receivabes Less: Alowance 240 3053 1339 211 1,048 1,148 4,141 3,053 2,154 2,8401,943 2,857 241 390 29201 213 3,g59 verttores Total Current Assets 9,753 9,214 PP&E (Net Other Assets 27,11626,98925,7723.950 2,556 Total Assets 37,964 a4 3,035 36,781 33,146 IABILITIES AND O WNERS EQUITY Accounts Payable 3.750 1534 3,710 1,837 277 nt. Potion L.T. Debt 1,824 1 296 5,923 16,917 hoome Taes 300 lot. Crt. Lab ties LongTerm Debt ob Lab ties Common Sodk Retained Eamings lob Lab ties and Sockholder's Equity 5,757 17,773 17,773 23,397 12,943 15,090 22,740 19817 1,824 12,417 12 ,981 11,906 33,984 38,035 38,791 32,146 FROJECTED UNAUDITED 12/31/12 12/31/12 12/3/11 12/31/1o 9,644 6,963 Net Sales Cost of Goods Sold Gross Proft R&D Expendtures 9,643 6,875 2,768 9,"O 6.828 2,902 9,649 6,851 2,799 2,681 SG&A 敏4 Profit fom Operations Other Inoome Interest Expense Other Expenses Income before Inc. Taxes Provision for linc. Taxes Net Income 1,652 1,994 1,770 1,808 724 PROJECTD UNAUDITED 12/31/12 12/31/12 12/31/11 12/31/10 Current Ratio (Curent Assets Current Liab.) Quidk Ratio (Curent Assets Less nventory/Curent Liab.) Grass Margin % haome be fore Taes as 1.52 1.39 1.49 95 291 %Of Sales Net income as a % of hventory Turnover Ending Inventory) Sales/Net Receivables) 244 2.83 2.58