Arin Pate, CPA, is scheduled to work on the integrated audits of two client companies in the coming month: Jacoh Industries and Morton Baxx, Ltd. Arin was assigned to both of these audit engagements in the prior year. As she works on the preliminary audit planning phase, Arin notes the following facts and features pertaining to each of these client companies:
a. Jacoh Industries is a manufacturer of medical imaging equipment. Although Jacoh’s equipment is distributed worldwide, it operates at a single location. The equipment is promoted through sales teams and sales are accepted through an online ordering system. There is a significant investment in inventories, and internal control in this area is strong. In fact, Arin’s firm has never had any significant audit differences or disagreements with the client. Within the past year, however, a new competitor has entered the market and Jacoh is experiencing a decline in sales volume. Although the company’s income statement still shows a slight profit, cash flow challenges are now prevalent. Jacoh, however, has not suffered as much as several other competitors who are reporting losses for the first time.
b. Morton Baxx publishes a monthly fashion magazine. Subscription revenues and many of the advertising revenues are deferred. Most subscriptions are sold on an annual basis, but advertising contracts range from one month to one year. Publishing costs are typically recorded in the period that they are incurred. Morton Baxx’s internal controls have been effective in the past.
In order to minimize audit risks on each of these audit engagements, what audit areas should Arin emphasize?