In: Business and Management

Submitted By Sophietran
Words 3606
Pages 15
ACCT 4400
Dr. Robertson
Case Set 2
Spring 2016

Case Set 2 covers issues related to risk assessment, planning, and substantive tests, and consists of the following cases:

Case 2-1: Risk Assessment
Case 2-2: Planning Phase Analytical Procedures
Case 2-3: Substantive Tests and Documentation

Case 2-1: Risk Assessment

Today is April 8, 2016, and your firm is currently in negotiations to renew the contract to audit Smith Corp. for the 2015 fiscal year (Smith uses a 12/31 year-end). Smith manufactures electronic components and sells these products to manufacturers of cell phones, e-readers, and tablets. The Smith family founded the company, which originally manufactured components for radios, in the 1930s. The grandchildren of the founder had no interest in active management of the company, and it went public in the 1990s under different management. Your firm has audited Smith for ten years, and has always issued standard, unqualified opinions for both the financial statements and internal controls during this time.

New federal regulations concerning the disposal of manufacturing byproducts will impact Smith’s manufacturing process this year by limiting Smith’s ability to sell these byproducts to other companies. Furthermore, the company will have to incur costs to implement new methods of waste disposal. In combination, these issues related to the new regulations are material.

To keep up with the rapid advancement of technological developments in its industry, Smith has invested heavily in R&D over the last few years. The R&D has led to several new products that are ready to be included in the manufacturing process this year. The company believes these products will allow it to be competitive for at least three years. To fund its R&D, the company used most of its available credit lines and issued common stock last year. The CFO, Sam Austin, informed you…...

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