(Developing responses to assessed risks) Your client, General Television, Inc. m
ID: 2377157 • Letter: #
Question
(Developing responses to assessed risks) Your client, General Television, Inc. manufactures televisions and during the current year acquired Micro Engineering, Inc., which manufactured flat panel plasma screens for computers so that it could compete in the market for flat panel televisions. Following is a list of several risks that have been identified in the audit of this television manufacturer.
Required
Answer the following questions for the risks described in 1, 2, and 3 above.
A. Identify the relevant assertion.
B. Does this assertion represent a significant inherent risk? Explain.
C. How might you respond to this risk in terms of staffing decisions?
D. How might you respond to this risk in terms of the nature of audit tests?
E. How might you respond to this risk in terms of the timing of audit tests?
F. How might you respond to this risk in terms of the extent of audit tests?
Explanation / Answer
1. a) The relevant assertion is occurrence.
b) Inherent risk represents that error occur in some areas than in others. In this case, the
value of total inventory in a volatile market might be overstated whether intentional or
not. When cost of goods is understated, inventory overstated, therefore profit is
overstated. Hence, inventory is an important part of this audit.
c) It would be wise to have highly trained staff, as it is an important part of audit where
error occurs more likely. Therefore, supervision of staff is warranted.
d) The test to be performed for the assertion is test of transactions and account balances.
These two methods are essential to prove internal controls to function properly.
e) Inventory tests of transactions occur at before year end. After tested some transactions,
the design of the audit program is to ensure that adequate testing will be completed.
Testing the account balances should be at the year end. Inventory testing should be one of
the area that audit team has to work upon.
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